CORPORATE GOVERNANCE STATEMENT

Transcription

1 CORPORATE GOVERNANCE STATEMENT Pavilion REIT Management Sdn Bhd, the Manager of Pavilion Real Estate Investment Trust, was set-up to manage and administer Pavilion REIT. The Manager shall, subject to the provisions of the Deed, carry out all activities, as it may deem necessary for the management of Pavilion REIT and its business. Objective The Manager shall, in managing Pavilion REIT, undertake primary management activities in relation to Pavilion REIT, including but not limited to overall strategy, risk management strategy, new acquisition and disposal analysis, marketing and communications, individual asset performance and business planning, market performance analysis and other activities as provided under the Deed with proper, diligent and efficient manner with acceptable and efficacious business practices in the real estate investment industry. Board Guidelines and Responsibilities The Board members, with their wide, varied range of expertise, skills and experiences have adopted the primary responsibilities as listed in the REITs Guidelines and good corporate governance, all of which is to steward Pavilion REIT s business and facilitate the discharge of the Manager s responsibilities with a view to enhance unitholders value and interest and maintaining high standards of transparency, accountability and integrity. The Board Charter was formally approved and adopted by the Board on 1 November The Board meets at least once every quarter and focuses on principal matters such as strategic issues and planning, including performance reviews and promoting business sustainability, setting the risk appetite, acquisitions and disposals, financial performance and advocating ethical standards through a code of conduct. Notices, agenda and meeting papers are circulated to directors in a timely manner to ensure that the directors have sufficient time to review the matters under consideration. All members of the Board have access to the advice and services of Company Secretary and are entitled to obtain independent professional advice in discharging their duties. Members of Board consists of twelve members, of which three are non-independent executive directors, five non-independent non-executive directors and four independent non-executive directors. Although the Chairman is an executive director with only one third of its Board being independent non-executive directors, the Board believes that the Chairman, who has significant interest in Pavilion REIT will act in the best interest of Pavilion REIT unitholders. All other recommended best practices proposed by Code of Corporate Governance 2012 have been adopted. The Chairman carries out a leadership role in the conduct of the Board and is primarily responsible for ensuring the adequacy and integrity of the governance process besides guiding and mediating the Board s action and maintaining regular dialogues with the CEO. The CEO, whose position is held separately by a different person, is responsible to ensure the effective implementation of strategic plan and policies established by the Board to manage the daily conduct of its business to ensure the smooth operations, supervision and management of Pavilion REIT. Guidelines for Related Party Transaction and Conflict of Interest Any director that has any interest, whether directly or indirectly, in a contract or proposed contract would have to declare his / her interest and not participate in deliberations and shall abstain from casting his / her votes in any matter arising therefrom. Should there be an actual, potential or perceived conflict of interest or a related corporate and a director, or an associate of a director as a spouse or other family members, the director involved shall make full disclosure and act honestly in the best interest of Pavilion REIT. Directors shall devote sufficient time to carry out their responsibilities. The Board will obtain this commitment from its members at the time of appointment. Directors shall notify the Chairman before accepting any new directorships and the notification shall provide for an indication of time that will be spent on the new appointment. The Manager has established internal control procedures to ensure that related party transactions are undertaken in compliance with Securities Commission REITs Guidelines, the Trust Deed and the Main Market Listing Requirements. Any related party transactions are to be established under normal commercial terms that are no less favourable than those arranged with independent parties. 48 Pavilion REIT 2017 Annual Report

2 Corporate Governance Statement (cont d) In respect of non-real estate related party transactions, the Manager has adopted the following parameter. 1) Transactions below the threshold of 0.5% of percentage ratio as stated under Paragraph 10.08(1) of Bursa Malaysia Securities Berhad Listing Requirements, for presentation to the Audit Committee for ratification 2) Transactions above the threshold of 0.5% of percentage ratio which are not related to contract subsisting from immediate preceding year is to be reviewed by the Audit Committee and recommended to the Board for announcement on Bursa Securities Malaysia Berhad with Trustee to be informed immediately with relevant details. Further to the establishment of Audit Committee, a Nominating Committee was formed on 24 April Please refer to their respective reports enclosed for further details. Policies and standard operating procedures for level of authority for transactions, maintenance and operations of Pavilion REIT s properties as well as acquisitions and divestments of investments procedures are available and will be continuously reviewed, enhanced and updated in line with changes in the operating environment. The CEO, as the official spokesperson for the Fund, has been actively meeting analysts, fund managers and investors besides attending investors roadshows and seminars. Besides timely announcements and disclosures to Bursa Malaysia, its website, is also regularly being updated. Please refer to Investors Relation and Fund Performance section for details of roadshows or seminars attended. Board Meetings The Board met five times during the financial year ended 31 December 2017 with details of attendance as stated below : Name of Directors Designation Number of meetings attended Tan Sri Lim Siew Choon Chairman and Non-Independent Executive Director 5/5 Puan Sri Tan Kewi Yong Non-Independent Executive Director 5/5 Dato Lee Tuck Fook Non-Independent Executive Director 5/5 Ahmed Ali H A Al-Hammadi Non-Independent Non-Executive Director 3/5 Ahmad Mohammed F Q Al-Khanji Non-Independent Non-Executive Director 3/5 Mohd Abdulrazzaq A A Al-Hashmi Non-Independent Non-Executive Director 4/5 Navid Chamdia Non-Independent Non-Executive Director 4/5 Ooi Ah Heong Non-Independent Non-Executive Director 5/5 Dato Mohzani bin Abdul Wahab Independent Non-Executive Director 5/5 Dato Maznah binti Abdul Jalil Independent Non-Executive Director 5/5 Dato Choo Chuo Siong Independent Non-Executive Director 5/5 Syed Mohd Fareed bin Shaikh Alhabshi Independent Non-Executive Director 5/5 Pavilion REIT 2017 Annual Report 49

3 Corporate Governance Statement (cont d) Directors training During the financial year under review, the Directors had attended various conferences and programmes to enhance their knowledge and expertise as well as to keep abreast with the relevant changes in law, regulations and business environment. Training programmes, seminar and conferences attended by the Directors during the financial year were : Affin Hwang Capital Conference Series 2017 : Opportunities Amidst Geopolitical Shifts Companies Act 2016 : Changes and Implications to Company Directors Companies Act 2016 Key Insights and Implication for Directors, Auditors/Accounts & Company Secretaries Maybank Kim Eng s Invest ASEAN Malaysia 2017 Tan Sri Panglima Andrew Sheng titled Implications of Trump on the Asian Supply Chain and Investment Environment Corporate Governance Breakfast Series - Leading The Brain Economics and Capital Market 1: Forces Shaping Global Capital Mrkets 2018 Budget and Its Impact on Capital Market Directors Remuneration The remuneration or fees due to its Directors are paid by the Manager and not Pavilion REIT. Dealings with Conflict of Interest / Related Party Transactions Should there be any actual, potential or perceived conflict of interest or related party transaction, the relevant party / director involved shall make full disclosure and act honestly and shall not participate in deliberations and shall abstain from casting his or her vote. The Audit Committee is responsible to review any related party transactions or conflict of interest situations and the Manager will ensure compliance with the Deed and any other regulatory guidelines. Communication with Unitholders and Investors Information for unitholders and investors are readily available via the various disclosures and announcements on Bursa Securities, its annual report and the corporate website, The CEO also regularly meets with analyst and fund managers to provide them with updates or upon request. 50 Pavilion REIT 2017 Annual Report

4 NOMINATING COMMITTEE REPORT The Nominating Committee has been established on 24 April 2013 and currently comprising five Non-Executive Directors with a majority of whom are independent directors. Name of Directors Designation Number of Meetings Attended Dato Maznah binti Abdul Jalil (Chairperson) Independent Non Executive Director 1/1 Dato Mohzani bin Abdul Wahab Independent Non-Executive Director 1/1 Dato Choo Chuo Siong Independent Non-Executive Director 1/1 Ooi Ah Heong Non-Independent Non-Executive Director 1/1 Mohd Abdulrazzaq A A Al-Hashmi Non-Independent Non-Executive Director 1/1 The Nominating Committee is responsible for identifying, nominating and orientating new directors, assessing the Board, Board Committees and the existing directors on an on-going basis, review the required mix of skills, experience and other qualities of the Directors to ensure that the Board and Board Committees are functioning effectively and efficiently. The Nominating Committee focuses on the skills, experience, competence and integrity to enable the Board to make effective business decisions and recommendations. For the independent directors, they are assessed based on their independence and abilities to discharge their responsibilities and functions with objective judgement. The Nominating Committee is also tasked with assessing and recommending the candidature of directors. There were no new appointment of director considered during the financial year ended 31 December The Board has not specified any gender policies in its evaluation of candidacy. However, the evaluation will be reviewed and revised from time to time to meet the needs of the Manager. During the financial year ended 31 December 2017, the Nominating Committee had assessed and reviewed the following : (i) (ii) (iii) (iv) (v) the performance of the Board and Board Committees; the contribution of each of the Directors; the independence of the Independent Non-Executive Directors; the term of office, performance of Audit Committee and each of its members; and to recommend those Directors retiring be nominated for re-election/re-appointment having regard to the individual s experience, contributions and performance. The Nominating Committee is satisfied with the performance of the Board, Board Committees and contribution of each of the Directors. The Independent Non-Executive Directors have maintained their independence and are competent to continue serving as the independent directors. Pavilion REIT 2017 Annual Report 51

5 AUDIT COMMITTEE REPORT The Audit Committee, formed on 24 October 2012 comprising of 4 members has been entrusted to assess the risks and control environment, oversee financial reporting, evaluate the internal and external audit process as well as to review conflict of interest situations and related party transactions. Name of Directors Designation Number of Meetings Attended Dato Mohzani bin Abdul Wahab (Chairman) Independent Non-Executive Director 6/6 Dato Maznah binti Abdul Jalil Independent Non-Executive Director 6/6 Dato Choo Chuo Siong Independent Non-Executive Director 6/6 ^ Navid Chamdia ^ Non-Independent Non-Executive Director 2/6 Mr Navid Chamdia did not attend the meetings held on 24 May 2017 and 25 July 2017 pertaining to the acquisition of Elite Pavilion Mall together with the related assets and rights as he is an interested director in the acquisition. Summary of work undertaken by Audit Committee during the year under review is as listed below :- (a) (b) (c) (d) (e) (f) (g) (h) (i) reviewed and deliberated with the Manager s management the quarterly financial results to recommend to the Board for approval and release to Bursa Malaysia. Consideration was given by Audit Committee to understand financial results of each properties with close attention given to update under Prospects reviewed list of related party transactions every quarter to determine whether there has been any material change as compared to the previous quarter and whether the transactions have been established under normal commercial terms that are no less favourable than those arranged with independent parties reviewed the internal control plan prepared by BDO Governance Advisory Sdn Bhd ( BDO ) and its availability of staff On 27 July 2017, a meeting was held by Audit Committee with BDO to assess the internal control review report prepared by them. BDO gave explanation on findings of review, proposed recommendations and corresponding Manager s responses, which were noted by the Audit Committee reviewed audit plan with external auditor, KPMG PLT by understanding its audit methodology, significant risk areas and accounting policies / disclosures and timing. KPMG PLT were also asked of its succession planning of its key personnel leading the audit and sufficiency of resources On 25 January 2018, the Audit Committee were briefed privately by KPMG PLT (without presence of the Manager s management) on status of its audit reviewed and commented on the audit committee report and statement of risk management and internal control for inclusion into the annual report evaluated the work scope, approach and fees to outsourced internal auditor and recommended for their engagement evaluated the approach and fees of external auditor and recommended for their engagement for the following year For the current year, BDO has been engaged to perform internal audit review for Pavilion REIT. Summary of its work undertaken during the year under review is as listed below :- (a) presented its work scope and timeframe covering key business processes of procurement to payment of property operating expenditure and property enhancement expenditure, tenancy management to collection of rentals, acquisition and divestment of investment properties as well as fund management activities (b) reviewed the adequacy and test the integrity of the system of internal controls (c) assessed compliance with policies and procedures and recommend best business practices (d) reviewed and identified potential areas for improvement in the effectiveness and efficiency of the processes (e) conducted a GST review of policies and procedures and the adherence to them (f) performed overall compliance of GST returns with sampling check on transactions, reconciliation and accuracy / logical checks of GST entries (g) conducted follow up review on status of implementation of management plan pertaining to previous year internal control review (h) presented findings of internal audit review to Audit Committee members 52 Pavilion REIT 2017 Annual Report

6 STATEMENT OF RISK MANAGEMENT AND INTERNAL CONTROL The Manager realises the significance of establishing a sufficient and effective risk management and internal control system, and has attended to this under the Pavilion REIT Operation Manual approved by the Board. Such process has been in place for the past years under review, including up to the date of approval of this statement for inclusion in the annual report. There is a policy in place pertaining to the level of authority required for transactions and standard operating procedures pertaining to operations and maintenance of Pavilion REIT s properties as well as acquisitions and divestments of property. The Audit Committee and Board meet at least once every quarter to review the financial performance of Pavilion REIT against the approved budget. The Board also reviews the business risk of Pavilion REIT, where identified by the CEO, internal auditor and external auditor and acts accordingly, where deemed appropriate. Board s approval is required for any proposed acquisition or disposal of investment property, which would be evaluated from the aspect of economic, environment, financial and risks relevant to the property industry / sector. The CEO meets the management regularly to review, monitor and manage risks identified by the management and thereafter, update the Audit Committee as required. Standard Operating Procedures for management of Pavilion REIT properties have been adopted, which comprise operational guide, control and monitoring procedures / reports. BDO Governance Advisory Sdn Bhd ( BDO ) has been appointed as internal auditor whereby they had performed internal control review of the following areas:- i) Procurement to Payment of Property Operating Expenses and Property Enhancements; ii) Tenancy Management to Collection of Rentals; iii) Fund Management Activities; and iv) GST Review The execution strategy that BDO adopts is one that is risk-based and process life cycle focused. Risk-based approach allows BDO to prioritise audit on functions or processes that are of the highest concern, or which will have significant impact to Pavilion REIT in the event of control failures. A process life cycle approach allows BDO to: Understand and evaluate business processes and related business controls from a risk perspective along the entire life cycle; Identify control, inadequacies within the processes and recommend practical solution; and Consider the effectiveness and efficiency of processes and controls, ie not just in terms on integrity but also in terms of process improvement opportunities The Audit Committee has reviewed the findings presented by BDO during the year. Recommendations made by BDO to document procedures in accordance with good practices will be revised, improved and updated in line with changes in the operating environment. The Board has received assurance from the CEO that the risk management and internal control system is operating sufficiently and effectively, in all material aspects. The Board is of the view that the risk management and internal control system in place for the year under review is adequate and effective. Nevertheless, it will always be improved and updated in line with changes in the operating environment. Due to inherent restrictions, the controls which are employed are intended to cope with and are not expected to eliminate all risks of failure to achieve business objectives. Established controls can only provide realistic and not total assurance against material misstatement of management and financial information or against financial losses and fraud. Pavilion REIT 2017 Annual Report 53

7 ADDITIONAL INFORMATION Sanctions and/or Penalties There is no public sanction and/or penalty imposed on Pavilion REIT, the Manager or Directors of the Manager by the relevant regulatory bodies during the financial year ended 31 December Audit and Non-Audit Fees Audit and non-audit fees payable to the external auditor of Pavilion REIT for the financial year ended 31 December 2017 amounted to RM185,000 and RM10,000 respectively. Soft Commission There was no soft commission received by the Manager during the financial year ended 31 December Material Litigation There is no material litigation pending since the issuance of the latest financial report. Directors Benefit For the year ended 31 December 2017, no Director of the Manager has received or become entitled to receive any benefit by reason of a contract made by the Fund or a related corporation with the Director or with a firm which the Director is a member, or with a company in which the Director has substantial financial interest except as disclosed in the Financial Statements. There were no arrangements during and at the end of the twelve months period which had the object of enabling Directors of the Manager to acquire benefits by means of acquisition of Units or debentures of the Fund or any other body corporate. Manager s Fee Pursuant to the Deed, the Manager is entitled to receive the following from the Fund :- i) a base fee ( Base Fee ) of up to 1.0% per annum of the total asset value of Pavilion REIT (excluding cash and bank balances which are held in non-interest bearing accounts). ii) a performance fee ( Performance Fee ) of up to 5.0% per annum of net property income of Pavilion REIT. iii) an incentive fee ( Incentive Fee ) receivable as follows effective from the second full financial year in which Pavilion REIT has been established and in operation (subject to the relevant approval by Pavilion REIT s unitholders being obtained). Fee Receivable (% per annum of the total asset value of Pavilion REIT) Up to 0.10% Up to 0.15% Up to 0.20% Criteria Provided that annual growth in the distributable income in a Financial Year (calculated before accounting for Incentive Fee in that Financial Year): Exceeds 7.5% and up to 10.0% Exceeds 10.0% and up to 12.5% Exceeds 12.5% iv) an acquisition fee ( Acquisition Fee ) of 1.0% of transaction value in relation to an acquisition of any real estate and real estate related assets directly or indirectly acquired. v) a divestment fee ( Divestment Fee ) of 0.5% of transaction value in relation to disposal of any real estate and real estate related assets directly or indirectly sold or divested. The Base Fee, Performance Fee, Acquisition Fee and Divestment Fee shall be receivable in the form of cash, new Units of Pavilion REIT or a combination thereof at the sole discretion of the Manager. The Incentive Fee is receivable in Units only. Fund management fees in cash are receivable within seven (7) days of the following events: i) in respect of the Base Fee and Performance Fee, the announcement of the relevant quarterly financial reports; ii) in respect of the Acquisition Fee and Divestment Fee, the completion of the relevant acquisition/divestment. Fund management fees in units are receivable upon approval from the authority for the listing of and quotation of Pavilion REIT Units. Where approval cannot be obtained, the fees shall be receivable in cash. 54 Pavilion REIT 2017 Annual Report

8 Additional Information (cont d) Other Information Before the statement of profit or loss and other comprehensive income and statement of financial position of Pavilion REIT were made out, the Manager took reasonable steps to ascertain that: i) all known bad debts have been written off and adequate provision made for doubtful debts, and ii) any current assets which were unlikely to be realised in the ordinary course of business have been written down to an amount which they might be expected so to realise. At the date of this report, the Manager is not aware of any circumstances: i) that would render the amount written off for bad debts, or the amount of the provision for doubtful debts in Pavilion REIT inadequate to any substantial extent, or ii) that would render the value attributed to the current assets in the financial statements of Pavilion REIT misleading, or iii) which have arisen which render adherence to the existing method of valuation of assets or liabilities of Pavilion REIT misleading or inappropriate, or iv) not otherwise dealt with in this report or the financial statements, that would render any amount stated in the financial statements of Pavilion REIT misleading. At the date of this report, there does not exist: i) any charge on the assets of Pavilion REIT that has arisen since the end of the financial year and which secures the liabilities of any other person, or ii) any contingent liability in respect of Pavilion REIT that has arisen since the end of the financial year. No contingent liability or other liability of Pavilion REIT has become enforceable, or is likely to become enforceable within the period of twelve months after the end of the financial year which, in the opinion of the Manager, will or may substantially affect the ability of Pavilion REIT to meet its obligations as and when they fall due. In the opinion of the Manager, the financial performance of Pavilion REIT for the financial year ended 31 December 2017 have not been substantially affected by any item, transaction or event of a material and unusual nature nor has any such item, transaction or event occurred in the interval between the end of that financial year and the date of this report. Auditor The auditors, Messrs KPMG PLT, have indicated their willingness to accept re-appointment. For and on behalf of Pavilion REIT Management Sdn Bhd TAN SRI LIM SIEW CHOON Chairman DATO LEE TUCK FOOK Non-Independent Executive Director Kuala Lumpur 25 January 2018 Pavilion REIT 2017 Annual Report 55

9 Financial Statements 57 Statement of Financial Position 58 Statement of Profit or Loss and Other Comprehensive Income 59 Statement of Changes in Net Asset Value 60 Statement of Cash Flows 62 Notes to the Financial Statements 96 Statement by the Manager 96 Statutory Declaration 97 Trustee s Report 98 Independent Auditors Report

10 STATEMENT OF FINANCIAL POSITION as at 31 December 2017 Note RM 000 RM 000 Assets Plant and equipment 4 2,129 1,958 Investment properties 5 5,268,000 5,229,000 Other non-current assets 6 58,000 Total non-current assets 5,328,129 5,230,958 Inventories 1,554 1,315 Trade and other receivables 7 48,098 43,074 Cash and bank balances 8 275, ,071 Total current assets 325, ,460 Total assets 5,653,164 5,592,418 Liabilities Borrowings 9 1,462,681 1,412,351 Payables and accruals 10 73,107 65,398 Total non-current liabilities 1,535,788 1,477,749 Payables and accruals , ,820 Total current liability 177, ,820 Total liabilities 1,712,887 1,671,569 Net asset value 3,940,277 3,920,849 Financed by Unitholders fund Unitholders capital 11 2,913,849 2,900,708 Accumulated income 1,026,428 1,020,141 Total unitholders fund 3,940,277 3,920,849 Net asset value ( NAV ) 3,940,277 3,920,849 Number of units in circulation ( 000 units) 11 3,030,094 3,022,525 NAV per unit (RM) The notes on pages 62 to 95 are an integral part of these financial statements. Pavilion REIT 2017 Annual Report 57

11 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME for the year ended 31 December 2017 Note RM 000 RM 000 Rental income 397, ,481 Other income 92,633 71,220 Gross revenue 490, ,701 Utilities (57,959) (56,037) Maintenance (49,781) (39,444) Property taxes (12,793) (12,010) Other operating expenses (46,555) (37,436) Net property income 322, ,774 Fair value gain on investment properties 17,028 76,872 Interest income 8,165 8,715 Gain on disposal of investment property 274 Net investment income 348, ,361 Manager s management fees 12 (26,651) (25,735) Trustee s fees 1(c) (470) (460) Valuation fee (548) (484) Other trust expenses (530) (492) Borrowing costs 13 (70,734) (61,047) Income before taxation 249, ,143 Tax expense 14 Income after taxation/total comprehensive income attributable to unitholders 249, ,143 Income after taxation is made up as follows: Realised 232, ,271 Unrealised 17,028 76, , ,143 Basic/Diluted earnings per unit (sen) Total comprehensive income 249, ,143 Distribution adjustments A 236 (63,359) Distributable income 249, ,784 Distribution per unit (sen) - interim Distribution per unit (sen) - final Note A Distribution adjustments comprise: Amortisation of transaction costs 3,435 3,096 Depreciation Fair value gain of investment properties (17,028) (76,872) Manager s management fees payable in units 12 13,325 9,761 The notes on pages 62 to 95 are an integral part of these financial statements. 236 (63,359) 58 Pavilion REIT 2017 Annual Report

12 STATEMENT OF CHANGES IN NET ASSET VALUE for the year ended 31 December 2017 Accumulated Unitholders income/ Total capital (deficit) funds Note RM 000 RM 000 RM 000 At 1 January ,893, ,561 3,851,607 Income after taxation/total comprehensive income for the year attributable to unitholders 312, ,143 Unitholders transactions Contributions by and distributions to unitholders Issue of new units 7,662 7,662 Distribution to unitholders 16 (250,563) (250,563) Increase/(Decrease) in net assets resulting from unitholders transactions 7,662 (250,563) (242,901) Net assets at 31 December 2016/ 1 January ,900,708 1,020,141 3,920,849 Income after taxation/total comprehensive income for the year attributable to unitholders 249, ,447 Unitholders transactions Contributions by and distributions to unitholders Issue of new units 13,141 13,141 Distribution to unitholders 16 (243,160) (243,160) Increase/(Decrease) in net assets resulting from unitholders transactions 13,141 (243,160) (230,019) Net assets at 31 December ,913,849 1,026,428 3,940,277 Note 11 The notes on pages 62 to 95 are an integral part of these financial statements. Pavilion REIT 2017 Annual Report 59

13 STATEMENT OF CASH FLOWS for the year ended 31 December 2017 Note RM 000 RM 000 Cash flows from operating activities Income before taxation 249, ,143 Adjustments for: Borrowing costs 13 70,734 61,047 Depreciation Fair value gain on investment properties (17,028) (76,872) Gain on disposal of investment property (274) Impairment loss on/(reversal of) trade receivables 1,459 (184) Interest income (8,165) (8,715) (Gain)/Loss on disposal of plant and equipment (1) 18 Plant and equipment written off 14 3 Operating income before changes in working capital 296, ,096 Changes in inventories (239) (78) Changes in receivables (5,691) (26,540) Changes in payables 1,905 40,747 Changes in tenants deposits 2,186 20,464 Net cash from operating activities 294, ,689 Cash flows from investing activities Acquisition of investment properties (529,051) Deposit for acquisition of investment properties (58,000) Interest received 8,165 8,715 Payment for enhancement of investment properties (22,540) (14,421) Pledged deposit (1,270) (20,442) Proceeds from disposal of investment property 88 Proceeds from disposal of plant and equipment 1 1 Purchase of plant and equipment (689) (1,276) Net cash used in investing activities (74,245) (556,474) Cash flows from financing activities Distribution to unitholders (243,160) (250,563) Interest paid (67,299) (57,951) Payment of financing expenses (276) (11,665) Proceed from borrowings 47, ,587 Repayment of borrowings (100,000) Net cash (used in)/from financing activities (263,564) 346,408 Net (decrease)/increase in cash and cash equivalents (42,958) 112,623 Cash and cash equivalents at 1 January 277, ,730 Cash and cash equivalents at 31 December (i) 234, , Pavilion REIT 2017 Annual Report

14 Statement of Cash Flows for the year ended 31 December 2017 (cont d) Note to Statement of cash flows (i) Cash and cash equivalents Cash and cash equivalents included in the statement of cash flows comprise the following statement of financial position amounts: Note RM 000 RM 000 Cash and bank balances 8 18,706 18,938 Deposits placed with licensed banks 8 256, , , ,071 Less: Pledged deposits 8 (40,988) (39,718) 234, ,353 The notes on pages 62 to 95 are an integral part of these financial statements. Pavilion REIT 2017 Annual Report 61

15 NOTES TO THE FINANCIAL STATEMENTS 1. General Pavilion Real Estate Investment Trust ( Pavilion REIT ) is a Malaysia-domiciled real estate investment trust constituted pursuant to a trust deed dated 13 October 2011 ( the Deed ) between Pavilion REIT Management Sdn. Bhd. ( the Manager ) and MTrustee Berhad ( the Trustee ). The Deed is regulated by the Securities Commission Act 1993, the Securities Commission s Guidelines on Real Estate Investment Trusts, the Listing Requirements of Bursa Malaysia Securities Berhad, the Rules of the Depository and taxation laws and rulings. Pavilion REIT will continue its operations until such time as determined by the Trustee and the Manager as provided under the provisions of Clause 26 of the Deed. The addresses of the Manager s registered office and principal place of business are as follows: Registered office Principal place of business 6-2, Level 6, East Wing Lot , Level 10 Menara Goldstone Pavilion Kuala Lumpur (Holiday Inn Express) 168, Jalan Bukit Bintang No.84, Jalan Raja Chulan Kuala Lumpur Kuala Lumpur The financial statements as at and for the financial year ended 31 December 2017 comprise the Pavilion REIT and its wholly-owned special purpose companies, Pavilion REIT Venture Capital Sdn. Bhd. and Pavilion REIT Bond Capital Berhad, companies incorporated in Malaysia, of which the principal activity are to raise financing for and on behalf of Pavilion REIT. Pavilion REIT is to invest, directly and indirectly in a diversified portfolio of income producing real estate used solely or predominantly for retail purposes with the primary objective to provide the unitholders with regular and stable distributions and achieve long-term growth in net assets value ( NAV ) (being the total unitholders fund) per unit, while maintaining an appropriate capital structure. Pavilion REIT was formally admitted to the Main Market of Bursa Malaysia Securities Berhad on 7 December Pavilion REIT entered into several service agreements in relation to the management of Pavilion REIT and its property operations. The fee structure of these services is as follows: (a) Property management fees The Property Manager, Henry Butcher Malaysia Sdn. Bhd., is entitled to property management fee of RM380,000 (2016: RM380,000) per annum (excluding goods and services tax). In addition, the Property Manager is also entitled to full reimbursement of costs and expenses incurred in the operation, maintenance, management and marketing of the properties held by Pavilion REIT (including but not limited to the cost relating to the employment and remuneration of on-site staff provided) ( Permitted Expenses ) as well as fees and reimbursements for Permitted Expenses payable to its service providers. (b) Manager s management fees Pursuant to the Deed, the Manager is entitled to receive the following fees from Pavilion REIT: (i) a base fee ( Base Fee ) of up to 1.0% per annum of the Total Asset Value of Pavilion REIT (excluding cash and bank balances which are held in non-interest bearing accounts). (ii) (iii) a performance fee ( Performance Fee ) of up to 5.0% per annum of Net Property Income. an incentive fee ( Incentive Fee ) payable as follows effective from the second full financial year in which Pavilion REIT has been established and in operation (subject to the relevant approval by unitholders being obtained). Fee Payable (% per annum of the Total Asset Value of Pavilion REIT) Up to 0.10% Up to 0.15% Up to 0.20% Criteria Provided that annual growth in the Distributable Income in a Financial Year (calculated before accounting for Incentive Fee in that Financial Year): Exceeds 7.5% and up to 10.0% Exceeds 10.0% and up to12.5% Exceeds 12.5% 62 Pavilion REIT 2017 Annual Report

16 Notes to the Financial Statements (cont d) 1. General (cont d) (b) Manager s management fees (cont d) (iv) an acquisition fee ( Acquisition Fee ) of 1.0% of transaction value in relation to an acquisition of any real estate and real estate related assets directly or indirectly acquired. (v) a divestment fee ( Divestment Fee ) of 0.5% of transaction value in relation to disposal of any real estate and real estate related assets directly or indirectly sold or divested. The Manager shall be paid the Base Fee, Performance Fee, Acquisition Fee and Divestment Fee in the form of cash, new units or a combination thereof at the election of the Manager in its sole discretion. The Incentive Fee is payable in units only. The payment of the Manager s management fee in the form of new units will be in accordance with the following formula: New Units to be issued as payment of the Management Company s management fee = Management Company s management fee payable in Units Market Price For this purpose, Market Price means the volume weighted average market price of the Units for the last 5 Market Days preceding the following events: (i) (ii) (iii) in respect of the Base Fee and Performance Fee, the announcement of the relevant quarterly financial reports; in respect of the Incentive Fee, the announcement of the annual financial statements; or in respect of the Acquisition Fee and Divestment Fee, the completion of the relevant acquisition/divestment, (each a Trigger Event ). With reference to any book closing date, where the Trigger Event is before but the issuance of the new Units relating to such Trigger Event is after the said book closing date, the Market Price will be further adjusted for the entitlement relating to such book closing date. The Manager will make an immediate announcement to Bursa Securities disclosing the number of new units to be issued and the issue price of the new units when new units are issued as payment for Management Fee. Payment of the Management Fees in units shall also be subjected to Pavilion REIT complying with the public spread requirements stated in the Main Market Listing Requirements and there being no adverse implications under the Malaysian Code on Take-Overs and Mergers (c) Trustee s fees In accordance to the Deed, an annual trusteeship fee of up to 0.05% per annum of NAV, but limited to RM470,000 for the current financial year, is to be paid to Trustee. The financial statements were approved by the Board of Directors of the Manager on 25 January Pavilion REIT 2017 Annual Report 63

17 Notes to the Financial Statements (cont d) 2. Basis of preparation (a) Statement of compliance The financial statements of Pavilion REIT have been prepared in accordance with the provisions of the Deed, Malaysian Financial Reporting Standards ( MFRSs ) and International Financial Reporting Standards. The following are accounting standards, amendments and interpretations that have been issued by the Malaysian Accounting Standards Board ( MASB ) but have not been adopted by Pavilion REIT: MFRSs, Interpretations and amendments effective for annual periods beginning on or after 1 January 2018 MFRS 9, Financial Instruments (2014) MFRS 15, Revenue from Contracts with Customers Clarifications to MFRS 15, Revenue from Contracts with Customers IC Interpretation 22, Foreign Currency Transactions and Advance Consideration Amendments to MFRS 1, First-time Adoption of Malaysian Financial Reporting Standards (Annual Improvements to MFRS Standards Cycle) Amendments to MFRS 2, Share-based Payment Classification and Measurement of Share-based Payment Transactions Amendments to MFRS 4, Insurance Contracts Applying MFRS 9 Financial Instruments with MFRS 4 Insurance Contracts Amendments to MFRS 128, Investments in Associates and Joint Ventures (Annual Improvements to MFRS Standards Cycle) Amendments to MFRS 140, Investment Property Transfers of Investment Property MFRSs, Interpretations and amendments effective for annual periods beginning on or after 1 January 2019 MFRS 16, Leases IC Interpretation 23, Uncertainty over Income Tax Treatments Amendments to MFRS 3, Business Combinations (Annual Improvements to MFRS Standards Cycle) Amendments to MFRS 9, Financial Instruments Prepayment Features with Negative Compensation Amendments to MFRS 11, Joint Arrangements (Annual Improvements to MFRS Standards Cycle) Amendments to MFRS 112, Income Taxes (Annual Improvements to MFRS Standards Cycle) Amendments to MFRS 123, Borrowing Costs (Annual Improvements to MFRS Standards Cycle) Amendments to MFRS 128, Investments in Associates and Joint Ventures Long-term Interests in Associates and Joint Ventures MFRSs, Interpretations and amendments effective for annual periods beginning on or after 1 January 2021 MFRS 17, Insurance Contracts MFRSs, Interpretations and amendments effective for annual periods beginning on or after a date yet to be confirmed Amendments to MFRS 10, Consolidated Financial Statements and MFRS 128, Investments in Associates and Joint Ventures Sale or Contribution of Assets between an Investor and its Associate or Joint Venture 64 Pavilion REIT 2017 Annual Report

18 Notes to the Financial Statements (cont d) 2. Basis of preparation (cont d) (a) Statement of compliance (cont d) Pavilion REIT plans to apply the abovementioned accounting standards, amendments and interpretations, where applicable: from the annual period beginning on 1 January 2018 for those accounting standards, amendments or interpretations that are effective for annual periods beginning on or after 1 January 2018, except for amendments to MFRS 1, 2, 4 and 128 which are not applicable to Pavilion REIT. from the annual period beginning on 1 January 2019 for those accounting standards, amendments or interpretations that are effective for annual periods beginning on or after 1 January 2019, except for amendments to MFRS 11 and 128 which are not applicable to Pavilion REIT. Pavilion REIT does not plan to apply MFRS 17, Insurance Contracts that is effective for annual periods beginning on 1 January 2021 as it is not applicable to Pavilion REIT. The initial application of the accounting standards, amendments or interpretations are not expected to have any material financial impacts to the current period and prior period financial statements of Pavilion REIT except as mentioned below: (i) (ii) MFRS 15, Revenue from Contracts with Customers MFRS 15 replaces the guidance in MFRS 111, Construction Contracts, MFRS 118, Revenue, IC Interpretation 13, Customer Loyalty Programmes, IC Interpretation 15, Agreements for Construction of Real Estate, IC Interpretation 18, Transfers of Assets from Customers and IC Interpretation 131, Revenue - Barter Transactions Involving Advertising Services. In the implementation of MFRS 15, Pavilion REIT has preliminary assessed the implementation of MFRS 15 and its impact is not expected to be material. MFRS 9, Financial Instruments MFRS 9 replaces the guidance in MFRS 139, Financial Instruments: Recognition and Measurement on the classification and measurement of financial assets and financial liabilities, and on hedge accounting. There are no change in measurement of financial assets of Pavilion REIT based on assessment undertaken to date. In respect of impairment of financial assets, MFRS 9 replaces the incurred loss model in MFRS 139 with an expected credit loss (ECL) model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments measured at fair value through other comprehensive income, but not to investments in equity instruments. Pavilion REIT has assessed the estimated impact that the initial application of ECL model will have on the financial statement as at 1 January 2018 and based on assessment undertaken to date, Pavilion REIT does not expect the impact to be material. Pavilion REIT 2017 Annual Report 65

19 Notes to the Financial Statements (cont d) 2. Basis of preparation (cont d) (a) Statement of compliance (cont d) (iii) MFRS 16, Leases MFRS 16 replaces the guidance in MFRS 117, Leases, IC Interpretation 4, Determining whether an Arrangement contains a Lease, IC Interpretation 115, Operating Leases Incentives and IC Interpretation 127, Evaluating the Substance of Transactions Involving the Legal Form of a Lease. MFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligations to make lease payments. There are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard which continues to be classified as finance or operating lease. Pavilion REIT is currently assessing the financial impact that may arise from the adoption of MFRS 16. (b) Basis of measurement The financial statements have been prepared on the historical cost basis other than as disclosed in Note 3. (c) (d) Functional and presentation currency These financial statements are presented in Ringgit Malaysia ( RM ), which is the functional currency of Pavilion REIT. All financial information is presented in RM and has been rounded to the nearest thousand, unless otherwise stated. Use of estimates and judgements The preparation of the financial statements in conformity with MFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimates are revised and in any future years affected. There are no significant areas of estimation uncertainty and critical judgments in applying accounting policies that have significant effect on the amounts recognised in the financial statements other than those disclosed in Note 5 investment properties and Note 9 borrowings. 66 Pavilion REIT 2017 Annual Report

20 Notes to the Financial Statements (cont d) 3. Significant accounting policies The accounting policies set out below have been applied consistently to the years presented in these financial statements by Pavilion REIT, unless otherwise stated. (a) Basis of consolidation (i) Subsidiaries (ii) Subsidiaries are entities, including structured entities, controlled by Pavilion REIT. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Pavilion REIT controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Potential voting rights are considered when assessing control only when such rights are substantive. Pavilion REIT also considers it has de facto power over an investee when, despite not having the majority of voting rights, it has the current ability to direct the activities of the investee that significantly affect the investee s return. Investments in subsidiaries are measured in the Pavilion REIT s statement of financial position at cost less any impairment losses, unless the investment is classified as held for sale or distribution. The cost of investment includes transaction costs. Business combinations Business combinations are accounted for using the acquisition method from the acquisition date, which is the date on which control is transferred to Pavilion REIT. For new acquisitions, Pavilion REIT measures the cost of goodwill at the acquisition date as: the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. For each business combination, Pavilion REIT elects whether it measures the non-controlling interests in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets at the acquisition date. Transaction costs, other than those associated with the issue of debt or equity securities, that Pavilion REIT incurs in connection with a business combination are expensed as incurred. (iii) Loss of control Upon the loss of control of a subsidiary, Pavilion REIT derecognises the assets and liabilities of the former subsidiary, any non-controlling interests and the other components of equity related to the former subsidiary from the consolidated statement of financial position. Any surplus or deficit arising on the loss of control is recognised in profit or loss. If Pavilion REIT retains any interest in the former subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently, it is accounted for as an equity accounted investee or as an available-for-sale financial asset depending on the level of influence retained. Pavilion REIT 2017 Annual Report 67

21 Notes to the Financial Statements (cont d) 3. Significant accounting policies (cont d) (a) Basis of consolidation (cont d) (iv) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing these financial statements. (b) Financial instruments (i) Initial recognition and measurement A financial asset or a financial liability is recognised in the statement of financial position when, and only when, Pavilion REIT becomes a party to the contractual provisions of the instrument. A financial instrument is recognised initially, at its fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial instrument. (ii) Financial instrument categories and subsequent measurement Pavilion REIT categorises financial instruments as follows: Financial assets Loans and receivables Loans and receivables category comprises debt instruments that are not quoted in an active market. Financial assets categorised as loans and receivables are subsequently measured at amortised cost using the effective interest method. Financial assets are subject to review for impairment (see Note 3(h)(i)). Financial liabilities All financial liabilities are subsequently measured at amortised cost. (iii) Derecognition A financial asset or part of it is derecognised when, and only when, the contractual rights to the cash flows from the financial asset expire or control of the asset is not retained or substantially all of the risks and rewards of ownership of the financial asset are transferred to another party. On derecognition of a financial asset, the difference between the carrying amount and the sum of the consideration received (including any new asset obtained less any new liability assumed) and any cumulative gain or loss that had been recognised in equity is recognised in profit or loss. A financial liability or a part of it is derecognised when, and only when, the obligation specified in the contract is discharged, cancelled or expires. On derecognition of a financial liability, the difference between the carrying amount of the financial liability extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss. 68 Pavilion REIT 2017 Annual Report

22 Notes to the Financial Statements (cont d) 3. Significant accounting policies (cont d) (c) Plant and equipment (i) Recognition and measurement Items of plant and equipment are measured at cost less any accumulated depreciation and any accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset and any other costs directly attributable to bringing the asset to working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. The cost of selfconstructed assets also includes the cost of materials and direct labour. For qualifying assets, borrowing costs are capitalised in accordance with the accounting policy on borrowing costs. The gain or loss on disposal of an item of plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of plant and equipment and is recognised net within other income and other expenses respectively in profit or loss. (ii) Subsequent costs (iii) The cost of replacing a component of an item of plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to Pavilion REIT, and its cost can be measured reliably. The carrying amount of the replaced component is derecognised to profit or loss. The costs of the day-to-day servicing of plant and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is based on the cost of an asset less its residual value. Significant components of individual assets are assessed, and if a component has a useful life that is different from the remainder of that asset, then that component is depreciated separately. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of plant and equipment. The estimated useful lives for the current and comparative year are as follows: Furniture and fittings IT equipment and software Motor vehicles Renovation Tools and office equipment 10 years 3 years 5 years 10 years 5 years Depreciation methods, useful lives and residual values are reviewed at end of the financial year, and adjusted as appropriate. (d) Investment property Investment property carried at fair value Investment properties are properties which are owned or held under a leasehold interest to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment properties are measured initially at cost and subsequently at fair value with any change therein recognised in the profit or loss for the financial year in which they arise. For investment properties acquired under equity-settled share-based payment transactions, the investment properties are initially measured at fair value, with corresponding increase in equity. Pavilion REIT 2017 Annual Report 69

23 Notes to the Financial Statements (cont d) 3. Significant accounting policies (cont d) (d) Investment property (cont d) Investment property carried at fair value (cont d) Cost includes expenditure that is directly attributable to the acquisition of the investment property. The cost of self-constructed investment property includes the cost of materials and direct labour, any other costs directly attributable to bringing the investment property to a working condition for their intended use and capitalised borrowing costs. An investment property is derecognised on its disposal, or when it is permanently withdrawn from use and no future economic benefits are expected from its disposal. The difference between the net disposal proceeds and the carrying amount is recognised in profit or loss in the financial year in which the item is derecognised. External, independent valuation firm(s), having appropriate recognised professional qualifications and recent experience in the location and category of property being valued, values Pavilion REIT s investment properties portfolio every year. (e) Leases (f) (g) A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments, the right to use an asset for an agreed period of time. Leases in terms of which Pavilion REIT assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Inventories Inventories represent general supplies used in the daily operations of Pavilion REIT. Inventories are measured at the lower of cost and net realisable value. The cost of inventories is measured based on first-in-first-out basis, and includes expenditure incurred in acquiring the inventories and other costs incurred in bringing them to their existing location and condition. Cash and cash equivalents Cash and cash equivalents consist of cash on hand, balances and deposits with banks and highly liquid investments which have an insignificant risk of changes in fair value with original maturities of three months or less. For the purpose of the statement of cash flows, cash and cash equivalents are presented net of bank overdrafts and pledged deposits. (h) Impairment (i) Financial assets All financial assets are assessed at each reporting date whether there is any objective evidence of impairment as a result of one or more events having an impact on the estimated future cash flows of the asset. Losses expected as a result of future events, no matter how likely, are not recognised. An impairment loss in respect of loans and receivables is recognised in profit or loss and is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account. 70 Pavilion REIT 2017 Annual Report

24 Notes to the Financial Statements (cont d) 3. Significant accounting policies (cont d) (h) Impairment (cont d) (ii) Other assets The carrying amounts of other assets (except for inventories and investment properties that are measured at fair value) are reviewed at the end of each financial year to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash-generating unit. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or cash-generating unit. An impairment loss is recognised if the carrying amount of an asset or its related cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. (i) Borrowing costs Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of cost of those assets. The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or completed. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. (j) Equity instruments Instruments classified as equity are measured at cost on initial recognition and are not remeasured subsequently. Costs directly attributable to issue of instruments classified as equity are recognised as a deduction from equity. (k) Revenue and other income (i) Rental income Rental income from investment properties is recognised in profit or loss on a straight-line basis over the term of the lease. (ii) Interest income Interest income is recognised as it accrues using the effective interest method in profit or loss except for interest income arising from temporary investment of borrowings taken specifically for the purpose of obtaining a qualifying asset which is accounted for in accordance with the accounting policy on borrowing costs. Pavilion REIT 2017 Annual Report 71

25 Notes to the Financial Statements (cont d) 3. Significant accounting policies (cont d) (k) Revenue and other income (cont d) (iii) Other income Other income consists of carpark income, utilities charges billed to tenants, events, advertising, turnover rent and other miscellaneous income, and is recognised in the profit or loss on an accrual basis. (l) Expenses (i) Property expenses Property expenses consist of property management fees, quit rents and assessment, and other property outgoings in relation to investment properties where such expenses are the responsibility of Pavilion REIT. Property management fees are recognised on an accrual basis. (ii) Manager s management fees (m) (iii) Manager s management fees are recognised on an accrual basis using the applicable formula, stipulated in Note 1(b). Income tax Trustee s fees Trustee s fees are recognised on an accrual basis using the applicable formula, stipulated in Note 1(c). Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination or items recognised directly in equity or other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted by the end of the financial year, and any adjustment to tax payable in respect of previous financial years. Deferred tax is recognised using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities in the statement of financial position and their tax bases. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, and the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss. Deferred tax is measured at the tax rates that are expected to apply to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the end of the financial year. Where investment properties are carried at their fair value in accordance with the accounting policy set out in Note 3(d), the amount of deferred tax recognised is measured using the tax rates that would apply on the sale of those assets at their carrying value at the reporting date unless the property is depreciable and is held with the objective to consume substantially all of the economic benefits embodied in the property over time, rather than through sale. In all other cases, the amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are not discounted. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax assets are reviewed at the end of each financial year and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 72 Pavilion REIT 2017 Annual Report

26 Notes to the Financial Statements (cont d) 3. Significant accounting policies (cont d) (n) Earnings per unit Pavilion REIT s earnings per unit ( EPU ) is presented based on basic and diluted format. Basic EPU is calculated by dividing the profit or loss attributable to unitholders of Pavilion REIT by the weighted average number of units outstanding during the year. Diluted EPU is determined by adjusting the profit or loss attributable to unitholders against the weighted average number of units outstanding adjusted for the effects of all dilutive potential units. (o) (p) Operating segments An operating segment is a component of Pavilion REIT that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Pavilion REIT s other components. Operating segment results are reviewed regularly by the chief operating decision maker, which in this case is the Chief Executive Officer of the Manager of Pavilion REIT, to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete segmental financial information is available. Fair value measurement Fair value of an asset or a liability, except for share-based payment and lease transactions, is determined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market or in the absence of a principal market, in the most advantageous market. For non-financial asset, the fair value measurement takes into account a market participant s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. When measuring the fair value of an asset or a liability, Pavilion REIT uses observable market data as far as possible. Fair value are categorised into different levels in a fair value hierarchy based on the input used in the valuation technique as follows: Level 1: Level 2: Level 3: quoted prices (unadjusted) in active markets for identical assets or liabilities that Pavilion REIT can access at the measurement date. inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. unobservable inputs for the asset or liability. Pavilion REIT recognises transfers between levels of the fair value hierarchy as of the date of the event or change in circumstances that caused the transfers. Pavilion REIT 2017 Annual Report 73

27 Notes to the Financial Statements (cont d) 4. Plant and equipment IT Furniture equipment Tools and and and Motor office fittings software vehicles Renovation equipment Total RM 000 RM 000 RM 000 RM 000 RM 000 RM 000 Cost At 1 January , ,146 4,025 Addition ,276 Disposal (12) (87) (99) Write off (2) (7) (9) (18) At 31 December 2016/ 1 January , ,328 5,184 Addition Disposal (8) (8) Write off (3) (22) (10) (35) At 31 December , ,863 5,830 Accumulated depreciation At 1 January ,651 2,665 Depreciation for the year Disposal (5) (75) (80) Write off (1) (7) (7) (15) At 31 December 2016/ 1 January ,975 3,226 Depreciation for the year Disposal (8) (8) Write off (2) (9) (10) (21) At 31 December ,103 3,701 Carrying amounts At 1 January ,360 At 31 December 2016/ 1 January ,958 At 31 December , Pavilion REIT 2017 Annual Report

28 Notes to the Financial Statements (cont d) 5. Investment properties RM 000 RM 000 At 1 January 5,229,000 4,483,000 Enhancements/Capital expenditure 22,540 14,421 Addition to investment properties 654,707 Disposal of investment property (568) Change in fair values recognised in profit or loss 17,028 76,872 At 31 December 5,268,000 5,229,000 Investment properties are charged as securities for bank borrowings as disclosed in Note 9. There was no acquisition fee paid to the Manager relating to the acquisition of investment property in 2017 (2016: 1.0% of purchase consideration for DA MEN and Intermark Mall included in the addition to investment properties). Divestment fee paid to the Manager relating to disposal of investment property based on 0.5% (2016: nil) of transaction value. Details of the investment properties are as follows: Percentage of fair value Occupancy Fair to NAV Date of Date of rates as at value as at Cost as at as at acquisition valuation Location Tenure % RM 000 RM 000 % Pavilion Kuala Lumpur Mall Kuala Lumpur Leasehold* 99 4,550,000 3,515, Pavilion Tower Kuala Lumpur Leasehold* , ,000 3 DA MEN Mall Subang Jaya Interest in perpetuity , , Intermark Mall Kuala Lumpur Interest in perpetuity , ,198 4 Investment properties 5,268,000 4,306,270 Percentage of fair value Occupancy Fair to NAV Date of Date of rates as at value as at Cost as at as at acquisition valuation Location Tenure % RM 000 RM 000 % Pavilion Kuala Lumpur Mall Kuala Lumpur Leasehold* 96 4,450,000 3,498, Pavilion Tower Kuala Lumpur Leasehold* , ,000 3 DA MEN Mall Subang Jaya Interest in perpetuity , , Intermark Mall Kuala Lumpur Interest in perpetuity , ,555 4 Investment properties 5,229,000 4,284,298 * The lease has a period of 99 years expiring in Pavilion REIT 2017 Annual Report 75

29 Notes to the Financial Statements (cont d) 5. Investment properties (cont d) 5.1 Fair value information All investment properties are categorised as Level 3 fair value. The following table shows the valuation techniques used in the determination of fair values within Level 3, as well as the significant unobservable inputs used in the valuation models. Description of valuation technique The investment method considers income and expense data relating to the subject property being valued and estimates value through a capitalisation process. Capitalisation relates income (usually a net income figure) and a defined value type by converting an income amount into a value estimate. This process may consider direct relationships (known as capitalisation rates), yield or discount rates (reflecting measures of return on investment), or both. In general, the principle of substitution holds that the income stream which produces the highest return commensurate with a given level of risk leads to the most probable value figure Level 3 fair value Significant unobservable inputs Risk-adjusted term capitalisation rates ranging from 5.50% to 6.70% (2016: 5.50% to 6.70%) for Pavilion Kuala Lumpur Mall and Pavilion Tower and 6.50% to 7.00% (2016: 6.25% to 6.75%) for Intermark Mall and DA MEN Mall. Risk-adjusted reversion capitalisation rate of 6.00% (2016: 6.00%) for Pavilion Kuala Lumpur Mall and Pavilion Tower and 6.75% (2016: 6.50%) for Intermark Mall and DA MEN Mall. Inter-relationship between significant unobservable inputs and fair value measurement The estimated fair value would increase (decrease) if: risk-adjusted term capitalisation rates were lower (higher). risk-adjusted reversion capitalisation rates were lower (higher). Individual strata titles in respect of the Pavilion Kuala Lumpur Mall, Pavilion Tower and DA MEN Mall have not been issued. The valuation is on the basis/assumption that individual strata titles in respect of the subject properties are forthcoming and when issued, will be free from all encumbrances and restrictive condition over the respective strata floor areas and Pavilion Kuala Lumpur Mall and Pavilion Tower will convey 99-year leasehold interest expiring in year The transfer of the land title in respect of Pavilion Kuala Lumpur Mall, Pavilion Tower and DA MEN Mall in favour of the Trustee is pending the issuance of strata title by the public authorities. The land title in respect of the Intermark Mall had been transferred in favour of the Trustee on 25 April Valuation processes applied by the Manager for Level 3 fair value The fair value of investment properties is determined by external, independent property valuers, having appropriate recognised professional qualifications and recent experience in the location and category of property being valued. In relying on the valuation reports, the Manager has exercised its judgment and is satisfied that the valuation methods and estimates are reflective of current market conditions. Highest and best use Pavilion REIT s investment properties are currently three retail malls and an office building. The properties on their own is the highest and best use, as two of the retail malls are on prime land in the city centre. The other retail mall is within a mix development which consist of residential and shop office. The office building has been refurbished in recent years, thus it is not cost effective to convert it to a retail mall at the moment. The office building also complements the retail mall by bringing human traffic to the retail mall, especially during lunch hours. 76 Pavilion REIT 2017 Annual Report

30 Notes to the Financial Statements (cont d) 6. Other non-current assets Included in other non-current assets were deposits placed for the proposed acquisition of Investment Property (see Note 25). 7. Trade and other receivables RM 000 RM 000 Current Trade Trade receivables 32,169 32,501 Less: Impairment losses (1,702) (2,864) 30,467 29,637 Non-trade Other receivables 8,984 8,909 Deposits 2,165 1,140 Prepayments 6,482 3, Cash and bank balances 17,631 13,437 48,098 43, RM 000 RM 000 Cash and bank balances 18,706 18,938 Deposits placed with licensed banks 256, , , ,071 Included in the deposits placed with licensed banks is an amount of RM40,988,000 (2016: RM39,718,000) which is maintained in Debt Service Reserve Accounts with licensed banks to cover a minimum of six months interest for banking facilities granted to Pavilion REIT (Note 9). 9. Borrowings Note RM 000 RM 000 Non-current Secured syndicated term loan , ,900 Secured term loan , ,988 Unrated medium term notes , ,000 Less: Unamortised transaction costs (6,378) (9,537) 1,462,681 1,412,351 Average interest rate of borrowings 4.6% 4.1% Pavilion REIT 2017 Annual Report 77

31 Notes to the Financial Statements (cont d) 9. Borrowings (cont d) 9.1 Secured syndicated credit facilities of RM815.9 million Pavilion REIT entered into a facility agreement and its supplementary facility agreement dated 3 November 2011 and 23 November 2011 respectively ( Facility Agreements ) through its wholly owned subsidiary, Pavilion REIT Venture Capital Sdn. Bhd. ( Borrower ) for syndicated credit facilities ( Facilities ) of up to RM815.9 million with licensed banks ( Lenders ) comprising revolving term loan facilities and bank guarantee as follows: (i) RTL1 - a revolving term loan ( RTL ) facility of up to RM705.9 million to part finance the acquisition of investment properties and future acquisitions by Pavilion REIT; (ii) (iii) RTL2 - a revolving term loan facility of up to RM100.0 million to finance general working capital of Pavilion REIT (including acquisition of assets); and BG/RTL3 - a bank guarantee ( BG ) of up to RM10.0 million for the issuance of performance bonds, bank guarantees, indemnities or undertakings and a revolving term loan facility for the conversion of any amounts paid out under the performance bonds, bank guarantees, indemnities or undertakings issued under bank guarantee. The tenure of the syndicated credit facilities had been extended to another five years from 7 December 2016 up to a maturity date of 7 December The Lenders have the option to convert RTL1 to a fixed interest rate at their sole discretion and subject to the consent of all Lenders. The revolving credit borrowings are secured over Pavilion Kuala Lumpur Mall and Pavilion Tower as disclosed in Note 5 with a fair value of RM4,683,000,000 (2016: RM4,583,000,000) and an amount of RM20,498,000 (2016: RM19,893,000) maintained in Debt Service Reserve Accounts with licensed banks as disclosed in Note Secured term loan facilities of RM486.8 million Pavilion REIT entered into a facility agreement and its supplementary letter of offer dated 22 March 2016 and 23 March 2016 respectively through its Trustee ( Borrower ) for credit facilities of up to RM486.8 million with licensed bank (the Bank ) comprising term loan, revolving credit facilities and bank guarantee as follows: (i) (ii) TL - a term loan ( TL ) facility of RM461.8 million to part finance the purchase consideration for the acquisition of the DA MEN Mall; RC - a revolving credit ( RC ) facility of up to RM25.0 million to part finance its working capital requirements; and (iii) BG - a bank guarantee facility of up to the maximum aggregate principal amount of RM3.0 million subject always to the RC/BG combined limit for the issuance of performance and financial guarantee in respect of the DA MEN Mall. The secured term loan facilities are secured over DA MEN Mall as disclosed in Note 5 with a fair value of RM416,000,000 (2016: RM483,000,000) and an amount of RM12,690,000 (2016: RM12,284,000) maintained in Debt Service Reserve Accounts with licensed banks as disclosed in Note Pavilion REIT 2017 Annual Report

32 Notes to the Financial Statements (cont d) 9. Borrowings (cont d) 9.3 Medium term notes of RM8.0 billion On 24 June 2015, the Securities Commission Malaysia had approved and authorised the establishment of a proposed medium term notes ( MTNs ) programme of RM8.0 billion in nominal value ( MTN Programme ) to be undertaken by Pavilion REIT Bond Capital Berhad ( Issuer ), a company wholly owned by Pavilion REIT. The MTN Programme shall have a tenure of twenty years from the date of the first issuance of MTNs under the MTN Programme. An issuance of MTNs under the MTN Programme may either be rated or unrated, as the Issuer may decide. As at the date of the financial statements, RM300.0 million of MTNs have been issued. The medium term notes are secured over Pavilion Kuala Lumpur Mall and Pavilion Tower as disclosed in Note 5 with a fair value of RM4,683,000,000 (2016: RM4,583,000,000) and an amount of RM7,800,000 (2016: RM7,541,000) maintained in Debt Service Reserve Accounts with licensed banks as disclosed in Note Reconciliations of movement of liabilities to cash flows arising from financing activities Net changes At 1 from At 31 January financing Other December 2017 cash flows changes 2017 RM 000 RM 000 RM 000 RM 000 Secured syndicated term loan 705,900 30, ,900 Secured term loan 415,988 17, ,159 Unrated medium term notes 300, ,000 Less: Unamortised transaction costs (9,537) (276) 3,435 (6,378) 10. Payables and accruals 1,412,351 46,895 3,435 1,462,681 Note RM 000 RM 000 Non-current Trade Tenants deposits ,107 65,398 Current Trade Trade payables 20,279 22,272 Tenants deposits ,473 48,996 63,752 71,268 Non-trade Other payables and accrued expenses , , , , , ,218 Pavilion REIT 2017 Annual Report 79

33 Notes to the Financial Statements (cont d) 10. Payables and accruals (cont d) 10.1 Tenants deposits are in respect of refundable deposits received from tenants for tenancy or marketing agreements. Tenancy agreements tenure are for period between one to three years. The amount is unsecured and interest free Included in other payables and accrued expenses are the following amounts due to: RM 000 RM 000 The Manager 10,856 8,880 Trustee Equine Park Country Resort Sdn. Bhd. 48,685 60,856 59,581 69,819 Amounts due to the Manager and Trustee are unsecured, interest-free and payable monthly in arrears. Amount due to Equine Park Country Resort Sdn. Bhd. ( Vendor ) is the balance of purchase price for the acquisition of DA MEN Mall and it is interest free. It is payable by instalments upon the delivery of the strata titles by the Vendor of the aforesaid property. 11. Total unitholders funds 11.1 Unitholders capital Number Number of units of units Approved fund size: At 31 December 3,318,000 3,100,000 Issued and fully paid up: At 1 January 3,022,525 3,017,842 Manager s management fees paid in units 7,569 4,683 At 31 December 3,030,094 3,022, RM 000 RM 000 At 1 January 2,900,708 2,893,046 Manager s management fees paid in units 13,141 7,662 At 31 December 2,913,849 2,900, Pavilion REIT 2017 Annual Report

34 Notes to the Financial Statements (cont d) 11. Total unitholders funds (cont d) 11.2 Unitholdings of substantial unitholders, the Manager and the Manager s Directors The Manager was issued units in Pavilion REIT as part settlement of Manager s management fees, details of which are as follows: Number of units Amount 000 RM Issued at RM per unit for entitlement for the 6 months ended 31 December ,759 6,656 Issued at RM per unit for entitlement for the 6 months ended 30 June ,810 6,485 Total Manager s fees paid in units 7,569 13, Issued at RM per unit for entitlement for the 6 months ended 31 December ,963 2,939 Issued at RM per unit for entitlement for the 6 months ended 30 June ,774 3,106 Issued at RM and RM per unit for entitlement to acquisition and disposal fee 946 1,617 Total Manager s fees paid in units 4,683 7,662 Pavilion REIT s substantial unitholders, the Manager and the Manager s Directors direct unitholdings in Pavilion REIT are as follows: Number Market Number Market of units value of units value 000 RM RM 000 Pavilion REIT s substantial unitholders direct unitholdings in Pavilion REIT: Qatar Holding LLC 1,082,900 1,743,469 1,082,900 2,057,510 Tan Sri Lim Siew Choon 845,425 1,361, ,425 1,606,308 Puan Sri Tan Kewi Yong 281, , , ,562 Employees Provident Fund Board 130, , , ,327 The Manager s direct unitholdings in Pavilion REIT 9,725 15,657 4,234 8,044 The Manager s Directors direct unitholdings in Pavilion REIT: Tan Sri Lim Siew Choon 845,425 1,361, ,425 1,606,308 Puan Sri Tan Kewi Yong 281, , , ,562 Dato Lee Tuck Fook Navid Chamdia Ooi Ah Heong Dato Mohzani Bin Abdul Wahab Dato Maznah Binti Abdul Jalil Notes: The market value of the units was computed based on the closing market price as at 31 December 2017 of RM1.61 (2016: RM1.90). Pavilion REIT 2017 Annual Report 81

35 Notes to the Financial Statements (cont d) 12. Manager s management fees RM 000 RM 000 Base fee 16,959 16,292 Performance fee 9,688 9,443 Divestment fee 4 26,651 25,735 Acquisition fee 6,468 During the financial year, the Manager received a base fee of 0.3% (2016: 0.3%) per annum of the Total Asset Value of Pavilion REIT, a performance fee of 3.0% (2016: 3.0%) per annum of Net Property Income and a divestment fee of 0.5% (2016: Nil) of transaction value in relation to disposal of real estate related assets. No acquisition fee incurred during the year (2016: 1.0% of transaction value in relation to the acquisition of DA MEN Mall and Intermark Mall was capitalised as part of the acquisition cost of investment properties as disclosed in Note 5). Manager s management fees payable in units amounts to RM13,325,000 (2016: RM11,378,000). 50% (2016: 25%) of total Manager s management fees for the first half of 2017 had been paid in units and 50% (2016: 50%) of the total Manager s management fees for the second half of 2017 would be payable in units. The balance of Manager s management fees will be paid in the following year. 13. Borrowing costs RM 000 RM 000 Interest expense 67,299 57,951 Amortisation of transaction costs 3,435 3,096 70,734 61, Tax expense Reconciliation of tax expense RM 000 RM 000 Income before taxation 249, ,143 Income tax using Malaysian tax rate of 24% (2016: 24%) 59,867 74,914 Non-deductible expenses 3,737 2,602 Non-taxable income (4,087) (18,449) Effect of income exempted from tax (59,517) (59,067) 82 Pavilion REIT 2017 Annual Report

36 Notes to the Financial Statements (cont d) 14. Tax expense (cont d) Pursuant to Section 61A of the Malaysian Income Tax Act, 1967 ( Act ), income of Pavilion REIT will be exempted from tax provided that at least 90% of its total income (as defined in the Act) is distributed to the investors in the basis period of Pavilion REIT for that year of assessment within two months after the close of the financial year. If the 90% distribution condition is not complied with or the 90% distribution is not made within two months after the close of Pavilion REIT financial year which forms the basis period for a year of assessment, Pavilion REIT will be subject to income tax at the prevailing tax rate on its total income. Income which has been taxed at the Pavilion REIT level will have tax credits attached when subsequently distributed to unitholders. As Pavilion REIT proposed to distribute 100% of its distributable income to its unitholders for financial year ended 31 December 2017, no provision for taxation has been made for the current year. 15. Earnings per unit basic and diluted The calculation of earnings per unit is based on income after taxation attributable to unitholders for the year of RM249,447,000 (2016: RM312,143,000) divided by the weighted average number of units in circulation during the year of 3,027,333,368 (2016: 3,020,648,551). 16. Distribution to unitholders Distribution to unitholders is from the following sources: RM 000 RM 000 Rental income 397, ,481 Other income 92,633 71,220 Fair value gain on investment properties 17,028 76,872 Interest income 8,165 8,715 Gain on disposal of investment property , ,288 Less: Total expenses (266,021) (233,145) 249, ,143 Distribution adjustments 236 (63,359) Distributable income 249, ,784 Distribution to unitholders 243, , Interim distribution per unit (sen) Final distribution per unit (sen) 4.28 * 4.08 Net distribution per unit** (sen) Pavilion REIT 2017 Annual Report 83

37 Notes to the Financial Statements (cont d) 16. Distribution to unitholders (cont d) * The final distributable income for the 6 months ended 31 December 2017 is proposed to be 4.28 sen per unit or RM129,688,000 payable on 28 February ** Withholding tax will be deducted for distributions made to the following categories of unitholders Withholding tax rate Resident corporate N/A^ N/A^ Resident non-corporate 10% 10% Non-resident individual 10% 10% Non-resident corporate 24% 24% Non-resident institutional 10% 10% ^ to tax at prevailing rate 17. Portfolio turnover ratio Portfolio Turnover Ratio ( PTR ) (times) -* 0.08 Included in the amount is times. The calculation of PTR is based on the average of total acquisitions and disposals of investments in Pavilion REIT for the year to the average net asset value during the year. During the year, Pavilion REIT had disposed an area measuring 2,324 square feet to Urusharta Cemerlang Sdn. Bhd. for a purchase consideration of RM880,000. The effect of the disposal during the year to PTR is insignificant. There was no new completed acquisitions during the year (2016: Pavilion REIT had completed its acquisitions for DA MEN Mall and Intermark Mall on the 25 March 2016 for purchase consideration of RM486,844,000 and RM160,000,000 respectively). Since the basis of calculating PTR can vary among real estate investment trusts, there is no sound basis for providing an accurate comparison of Pavilion REIT s PTR against other real estate investment trusts. 18. Management expense ratio Management expense ratio ( MER ) (%) The calculation of the MER is based on the total fees of Pavilion REIT incurred during the year, including manager s management fees, trustee s fees, valuation fee and other trust expenses, to the net asset value as at year end. Comparison of the MER of Pavilion REIT with other real estate investment trusts which uses different basis of calculation may not be an accurate comparison. 84 Pavilion REIT 2017 Annual Report

38 Notes to the Financial Statements (cont d) 19. Operating segments Pavilion REIT has two reportable segments, Retail and Office. For each of the segment, the Manager of Pavilion REIT s Chief Executive Officer reviews internal management reports regularly. Performance is measured based on segment net property income as management believes that such information is the most relevant in evaluating the results of the segments. The total of segment assets/liability is measured based on all assets/liabilities of a segment, as included in internal management reports that are reviewed by the Manager of Pavilion REIT s Chief Executive Officer. Retail Office Total RM 000 RM 000 RM 000 For the year ended 31 December 2017 Segment profit 314,907 8, ,913 Included in the measure of segment profit are: Gross revenue 477,544 12, ,001 Property expenses 162,637 4, ,088 At 31 December 2017 Segment assets and liabilities Segment assets 5,491, ,561 5,624,866 Segment liabilities 1,678,700 30,251 1,708,951 For the year ended 31 December 2017 Included in the measure of segment assets and liabilities are: Additions to non-current assets 79,972 79,972 Fair value gain to non-current assets 17,028 17,028 For the year ended 31 December 2016 Segment profit 305,911 8, ,774 Included in the measure of segment profit are: Gross revenue 447,139 12, ,701 Property expenses 141,228 3, ,927 At 31 December 2016 Segment assets and liabilities Segment assets 5,430, ,019 5,564,955 Segment liabilities (1,641,094) (30,210) (1,671,304) For the year ended 31 December 2016 Included in the measure of segment assets and liabilities are: Additions to non-current assets 604, ,328 Fair value gain to non-current assets 76,872 76,872 Pavilion REIT 2017 Annual Report 85

39 Notes to the Financial Statements (cont d) 19. Operating segments (cont d) Reconciliation of reportable segment profit RM 000 RM 000 Total profit for reportable segments 322, ,774 Fair value gain on investment properties 17,028 76,872 Gain on disposal of investment property 274 Interest income 7,330 7,925 Other non allocated income Trust expenses (28,199) (27,171) Borrowing costs (70,734) (61,047) Income before taxation 249, ,143 Taxation Income after taxation 249, ,143 Reconciliation of reportable segment assets and liabilities Segment assets RM 000 Segment liabilities RM Total reportable segments 5,624,866 (1,708,951) Other non-allocated assets/(liabilities) 28,298 (3,936) Total assets/(liabilities) 5,653,164 (1,712,887) 2016 Total reportable segments 5,564,955 (1,671,304) Other non-allocated assets/(liabilities) 27,463 (265) Total assets/(liabilities) 5,592,418 (1,671,569) Geographical information No geographical segment information has been prepared as all the investment properties of Pavilion REIT are located in Malaysia. 86 Pavilion REIT 2017 Annual Report

40 Notes to the Financial Statements (cont d) 20. Financial instruments 20.1 Categories of financial instruments The table below provides an analysis of financial instruments categorised as loans and receivables and financial liabilities measured at amortised cost. Carrying Loans and Carrying Loans and amounts receivables amounts receivables RM 000 RM 000 RM 000 RM 000 Financial assets Receivables and deposits 41,616 41,616 39,686 39,686 Cash and bank balances 275, , , , , , , ,757 Financial Financial liabilities liabilities Carrying measured at Carrying measured at amounts amortised cost amounts amortised cost RM 000 RM 000 RM 000 RM 000 Financial liabilities Payables and accruals 250, , , ,218 Borrowings 1,462,681 1,462,681 1,412,351 1,412, Net gains and losses arising from financial instruments 1,712,887 1,712,887 1,671,569 1,671, RM 000 RM 000 Loans and receivables 6,706 8,899 Borrowings (70,734) (61,047) (64,028) (52,148) 20.3 Financial risks management Pavilion REIT has exposure to the following risks from its use of financial instruments: Credit risk Liquidity risk Market risk Pavilion REIT 2017 Annual Report 87

41 Notes to the Financial Statements (cont d) 20. Financial instruments (cont d) 20.4 Credit risk Credit risk is the risk of a financial loss to Pavilion REIT if the tenants or counterparty to a financial instrument fails to meet its contractual obligations. Pavilion REIT s exposure to credit risk arises principally from trade and other receivables and cash and cash equivalents. Pavilion REIT performs ongoing credit evaluation of its tenants and generally does not require collateral other than tenants deposits. At the end of the financial year, the maximum exposure to credit risk arising from financial assets are represented by the carrying amount of financial assets in the statement of financial position. Receivables Risk management objectives, policies and processes for managing the risk Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Exposure to credit risk and credit quality Management has taken reasonable steps to ensure that receivables that are neither past due nor impaired are stated at their realisable values. Pavilion REIT manages credit risk using credit verification process to ensure credit worthiness and good credit standing before tenancy agreements are entered into with tenants or credit granted to counter parties together with constant monitoring of any outstanding balances to ensure minimum credit risk exposure. Impairment losses Pavilion REIT maintains an ageing analysis in respect of trade receivables only. The ageing of trade receivables as at the end of the financial year was: Impairment Gross loss Net RM 000 RM 000 RM Not past due Past due 0-30 days 8,018 8,018 Past due days 11,773 (9) 11,764 Past due more than 90 days 11,784 (1,693) 10,091 32,169 (1,702) 30, Not past due 1,693 1,693 Past due 0-30 days 9,176 9,176 Past due days 9,278 9,278 Past due more than 90 days 12,354 (2,864) 9,490 32,501 (2,864) 29, Pavilion REIT 2017 Annual Report

42 Notes to the Financial Statements (cont d) 20. Financial instruments (cont d) 20.4 Credit risk (cont d) The movements in the allowance for impairment losses of receivables during the financial year were: RM 000 RM 000 At 1 January 2,864 3,048 Impairment loss reversal (1,162) (184) At 31 December 1,702 2,864 The allowance account in respect of trade receivables is used to record impairment losses. Unless Pavilion REIT is satisfied that recovery of the amount is possible, the amount considered irrecoverable is written off against the receivable directly. Cash and cash equivalents Risk management objectives, policies and processes for managing the risk Pavilion REIT s short term deposits are placed at fixed rate investments and upon which management endeavours to obtain the best rate available in the market. Cash and cash equivalents are placed with licensed financial institutions. Exposure to credit risk and credit quality As at the end of the financial year, the maximum exposure to credit risk is represented by their carrying amounts in the statement of financial position. Impairment losses As at the end of the financial year, there was no indication that cash and cash equivalents were not recoverable Liquidity risk Liquidity risk is the risk that Pavilion REIT will not be able to meet its financial obligations as they fall due. Pavilion REIT s exposure to liquidity risk arises principally from its various payables and borrowings. The Manager maintains a level of cash and cash equivalents and bank facilities deemed adequate to finance Pavilion REIT s operations, to distribute income to unitholders, and to mitigate the effects of fluctuations in cash flows. In addition, the Manager also monitors and observes the Securities Commission s Guidelines on Real Estate Investment Trust concerning limits on total borrowings financing. Pavilion REIT 2017 Annual Report 89

43 Notes to the Financial Statements (cont d) 20. Financial instruments (cont d) 20.5 Liquidity risk (cont d) Maturity analysis The table below summarises the maturity profile of Pavilion REIT s financial liabilities as at the end of the financial year based on undiscounted contractual payments. Carrying Contractual Contractual Less than amount interest cash flow 1 year years years RM 000 rate% RM 000 RM 000 RM 000 RM Financial liabilities Borrowings 1,462, ,639,085 64, , ,542 Payable and accruals 250, , ,099 51,604 21,503 1,712,887 1,889, , , , Financial liabilities Borrowings 1,412, ,668,746 68,987 68,987 1,530,772 Payable and accruals 259, , ,820 20,034 45, Market risk 1,671,569 1,927, ,807 89,021 1,576,136 Market risk is the risk that changes in market prices such as interest rates will affect Pavilion REIT s financial position or cash flows Interest rate risk Pavilion REIT s exposure to changes in interest rates relates principally to interest-earning financial assets and interest-bearing financial liabilities. Risk management objectives, policies and processes for managing the risk Interest rate risk is managed by the Manager on an on-going basis with the primary objective of limiting the extent to which net interest expense could be affected by adverse movements in interest rates. The interest rate risks are uncertainties resulting from the effects of fluctuations in the prevailing level of the market interest rates on its financial position and cash flows. Interest rate risk exposure to Pavilion REIT is in respect of short-term deposits and borrowings. 90 Pavilion REIT 2017 Annual Report

44 Notes to the Financial Statements (cont d) 20. Financial instruments (cont d) 20.6 Market risk (cont d) Interest rate risk (cont d) Exposure to interest rate risk The interest rate profile of Pavilion REIT s significant interest-bearing financial instruments, based on carrying amounts at the end of the financial year was: RM 000 RM 000 Fixed rate instrument Financial asset - Deposits placed with licensed banks 256, ,133 Financial liabilities - Borrowings (300,000) (300,000) (43,323) (1,867) Floating rate instruments Financial liabilities - Borrowings (1,162,681) (1,112,351) Interest rate risk sensitivity analysis (a) Fair value sensitivity analysis for fixed rate instruments Pavilion REIT does not account for any fixed rate financial instruments at fair value. Therefore, a change in interest rates at the end of the financial year would not affect profit or loss or equity. (b) Cash flow sensitivity analysis for variable rate instruments 20.7 Fair value information Cash flow risk arising from variable rate instruments is not material to Pavilion REIT. Hence, sensitivity analysis is not presented. The carrying amounts of cash and bank balances, receivables and deposits, payables and accruals approximate their fair values due to the relatively short term nature of these financial instruments. The table below analyses financial instruments not carried at fair value, together with their fair values and carrying amounts shown in the statement of financial position. Fair value of financial instruments Total not carried at fair value fair Carrying Level 1 Level 2 Level 3 value amount RM 000 RM 000 RM 000 RM 000 RM Financial liabilities Tenants deposits (110,944) (110,944) (116,580) Borrowings (1,434,359) (1,434,359) (1,462,681) (1,545,303) (1,545,303) (1,579,261) 2016 Financial liabilities Tenants deposits (120,205) (120,205) (114,394) Borrowings (1,430,330) (1,430,330) (1,412,351) (1,550,535) (1,550,535) (1,526,745) Pavilion REIT 2017 Annual Report 91

45 Notes to the Financial Statements (cont d) 20. Financial instruments (cont d) 20.7 Fair value information (cont d) Level 3 fair value The following table shows the valuation techniques used in the determination of fair values within Level 3. Financial instruments not carried at fair value Type Tenants deposits, borrowings Description of valuation technique and inputs used Discounted cash flows using a rate based on the current market rate of borrowing of Pavilion REIT at the reporting date. The discount rates used above have incorporated credit risk of Pavilion REIT and liquidity risk of the instruments. The inputs for these risks are unobservable because there are no identical or similar instruments to benchmark to. 21. Capital management Pavilion REIT s objectives when managing capital is to provide unitholders with regular and stable distributions and achieve long-term growth in NAV per unit, while maintaining an appropriate capital structure. Pavilion REIT s capital is represented by its unitholders fund in the statement of financial position. The capital requirements imposed on Pavilion REIT is to ensure it maintains a healthy gearing ratio of maximum 50% and meets the minimum interest coverage ratio which is an effective indicator of its financial strengths in addition to complying with the financial covenants prescribed by financial institutions as stated in the Facility Agreements. The Directors of the Manager will monitor and are determined to maintain an optimal gearing ratio that will provide an ideal debt equity ratio that also complies with regulatory requirements. As at 31 December 2017, Pavilion REIT recorded a gearing ratio of 25.87% (2016: 25.25%) and interest coverage ratio in excess of the minimum requirement (2016: in excess of the minimum requirement). The calculation of the gearing ratio and interest coverage ratio is based on the definition stated in the Facility Agreements. Pavilion REIT has not breached the financial covenants. Distribution Policy The Deed provides that the Manager shall, with the approval of the Trustee, for each distribution period, distribute all (or such other percentage as determined by the Manager at its absolute discretion) of Pavilion REIT s distributable income. It is the intention of the Manager to distribute at least 90.0% of Pavilion REIT s distributable income on a half-yearly basis (or such other interval as determined by the Manager at its absolute discretion). 22. Operating leases Leases as lessor Pavilion REIT leases out its investment properties (Note 5) under operating leases. The future minimum lease receivable under non-cancellable leases are as follows: RM 000 RM 000 Less than one year 354, ,870 Between one and five years 351, , , , Pavilion REIT 2017 Annual Report

46 Notes to the Financial Statements (cont d) 23. Capital commitments Capital expenditure in respect of the following has not been provided for in the financial statements: RM 000 RM 000 Capital expenditure commitments Investment properties Authorised and contracted for: - Within one year 522, Significant related party transactions For the purposes of these financial statements, parties are considered to be related to Pavilion REIT if Pavilion REIT has the ability, directly or indirectly, to control or jointly control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where Pavilion REIT and the party are subject to common control. Related parties may be individuals or other entities. Related parties also include key management personnel defined as those persons having authority and responsibility for planning, directing and controlling the activities of Pavilion REIT either directly or indirectly. The key management personnel include all the Directors of Pavilion REIT Management Sdn. Bhd. and MTrustee Berhad, and certain members of senior management of Pavilion REIT Management Sdn. Bhd. and MTrustee Berhad. Significant related party transactions, other than those disclosed elsewhere in the financial statements, are as follows: Companies related to the Manager Pavilion REIT Management Sdn. Bhd. Malton Berhad Group * Crabtree & Evelyn (Malaysia) Sdn. Bhd. # Lumayan Indah Sdn. Bhd. Impian Ekspresi Sdn. Bhd. Kuala Lumpur Pavilion Sdn. Bhd. ^ Urusharta Cemerlang (KL) Sdn Bhd Urusharta Cemerlang Sdn. Bhd. α Nature of transactions Transaction value 2017 RM RM 000 Balance outstanding 2017 RM RM 000 Rental income and its related charges Rental income and its related charges 3,086 3, Rental income and its related charges 843 1, Purchase of product (283) (70) (6) Rental income and its related charges Rental income and its related charges Expenses of MRT station naming rights fee and its related charges (1,575) Rental income and its related charges Reimbursement of electricity supply to Elite Pavilion Mall 6,086 1,214 Disposal of part area in Pavilion Kuala Lumpur Mall The above transactions have been entered into in the normal course of business and have been established based on negotiated terms and conditions. Pavilion REIT 2017 Annual Report 93

47 Notes to the Financial Statements (cont d) 24. Significant related party transactions (cont d) The above parties are deemed related as follows: * Malton Berhad Group are deemed parties related to the Manager by virtue of the directorship and interest of Tan Sri Lim Siew Choon and Puan Sri Tan Kewi Yong, his spouse, in Malton Berhad. # Crabtree & Evelyn (Malaysia) Sdn. Bhd. is deemed party related to the Manager by virtue of Tan Sri Lim Siew Choon s interest in Crabtree & Evelyn (Malaysia) Sdn. Bhd. and his spouse, Puan Sri Tan Kewi Yong. Ahmad Mohammed F Q Al-Khanji, Mohd Abdulrazzaq A A Al-Hashmi and Navid Chamdia are directors of the Manager and Lumayan Indah Sdn. Bhd. ^ Impian Ekspresi Sdn. Bhd. is deemed party related to the Manager by virtue of Tan Sri Lim Siew Choon s directorship and deemed interest in Impian Ekspresi Sdn Bhd and his spouse, Puan Sri Tan Kewi Yong. Tan Sri Lim Siew Choon, Puan Sri Tan Kewi Yong and Dato Lee Tuck Fook are directors of Kuala Lumpur Pavilion Sdn. Bhd. Tan Sri Lim Siew Choon and Puan Sri Tan Kewi Yong hold the entire issued and paid up share capital of Kuala Lumpur Pavilion Sdn. Bhd. Tan Sri Lim Siew Choon, Ahmad Mohammed F Q Al-Khanji, Mohd Abdulrazzaq A A Al-Hashmi and Navid Chamdia are directors of the Manager and Urusharta Cemerlang (KL) Sdn. Bhd. ( UCKL ). α Tan Sri Lim Siew Choon is deemed interested in UCKL through his interest in the ultimate holding company and Puan Sri Tan Kewi Yong is his spouse. Ahmad Mohammed F Q Al-Khanji and Mohd Abdulrazzaq A A Al-Hashmi are also directors of a substantial shareholder of the holding company of UCKL. Tan Sri Lim Siew Choon, Puan Sri Tan Kewi Yong, Dato Lee Tuck Fook, Ahmed Ali H A Al-Hammadi, Ahmad Mohammed F Q Al-Khanji, Mohd Abdulrazzaq A A Al-Hashmi and Navid Chamdia are directors of the Manager and Urusharta Cemerlang Sdn. Bhd. ( UCSB ). Tan Sri Lim Siew Choon and Puan Sri Tan Kewi Yong are deemed interested in UCSB through their interest in the ultimate holding company. Ahmad Mohammed F Q Al-Khanji and Mohd Abdulrazzaq A A Al-Hashmi are also directors of a company which is a substantial shareholder of UCSB. 25. Significant events during the financial year On 27 July 2017, the Board of Directors of the Manager, CIMB Investment Bank Berhad and Maybank Investment Bank Berhad announced that MTrustee Berhad, as trustee of Pavilion REIT ( Trustee ), had entered into the following agreements in relation to the Proposed Acquisition : a) Conditional sale and purchase agreement with Urusharta Cemerlang (KL) Sdn Bhd ( UCKL ) for the acquisition of Elite Pavilion Mall comprising the followings, for a total purchase consideration of RM580,000,000 ( Elite SPA ): i. Level B3, Level B2, Level B1, Level 1 Level 10 (inclusive), Level 10M, Level 10MM, Level 11 (including roof) and Level 52 (including the external façade of Level 52 up to roof level) of the building, and the stratified parcels comprising, amongst others, 50 car park bays located at Level B3 to Level 2 within the building. The strata floor area is approximately 437,585 square feet; ii. iii. The assignment of all benefits, rights and entitlements to an underground pedestrian tunnel with strata floor area of approximately 8,697 square feet together with retail outlets and other relevant spaces that interconnects Elite Pavilion Mall with Fahrenheit 88 shopping mall across Jalan Bukit Bintang, Kuala Lumpur ( Subway Linkage ); The transfer of tenancies within Elite Pavilion Mall and the Subway Linkage under the transfer agreements ( Transferred Agreements ). 94 Pavilion REIT 2017 Annual Report

48 Notes to the Financial Statements (cont d) 25. Significant events during the financial year (cont'd) b) An agreement with Urusharta Cemerlang Sdn Bhd ( UCSB ) and UCKL for UCSB to vest to the Trustee of all rights, title, interest, benefits, and entitlement to and ownership of amongst others, the pedestrian link bridges on Levels 4 to 7 with seating and/or retail areas located on Levels 4 to 10 that interconnect Elite Pavilion Mall with Pavilion KL Mall (with strata floor area of approximately 18,407 square feet) together with the transfer of all rights, benefits and entitlement to the on-going tenancies on these areas to the Trustee ( Vesting Agreement ). The Elite SPA and Vesting Agreement are inter-conditional upon each other and are to be completed concurrently. In conjunction with the Proposed Acquisition, The Board proposes to undertake the Proposed Placement of up to 218,000,000 new units in Pavilion REIT ( Unit ) of the total units in circulation, by way of bookbuilding to partly fund the Proposed Acquisition and also defray the expenses relating to the Proposals. On 17 October 2017, Securities Commission had approved the issuance of up to 218,000,000 new Units under the Proposed Placement, listing and quotation of up to 218,000,000 new Units under the Proposed Placement on the Main Market of Bursa Securities. On 30 November 2017, Bursa Securities had approved the listing and quotation of up to 218,000,000 new Units to be issued pursuant to the Proposed Placement on the Main Market of Bursa Securities. In the Unitholders Meeting convened on 16 January 2018, the unitholders approved the Proposed Acquisition. The Board of Directors of the Manager expects the Proposed Acquisition to be completed by first quarter of Pavilion REIT 2017 Annual Report 95

49 STATEMENT BY THE MANAGER In the opinion of the Directors of the Manager, the financial statements set out on pages 57 to 95 are drawn up in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards, so as to give a true and fair view of the financial position of Pavilion Real Estate Investment Trust as at 31 December 2017 and of their financial performance and cash flows for the year ended on that date. For and on behalf of the Manager, Pavilion REIT Management Sdn. Bhd., Signed in accordance with a resolution of the Directors of the Manager:... Tan Sri Lim Siew Choon Director... Dato Lee Tuck Fook Director Kuala Lumpur, Date: 25 January 2018 STATUTORY DECLARATION I, Dato Lee Tuck Fook, the Director of Pavilion REIT Management Sdn. Bhd. primarily responsible for the financial management of Pavilion Real Estate Investment Trust, do solemnly and sincerely declare that the financial statements set out on pages 57 to 95 are, to the best of my knowledge and belief, correct and I make this solemn declaration conscientiously believing the same to be true, and by virtue of the provisions of the Statutory Declarations Act, Subscribed and solemnly declared by the abovenamed Dato Lee Tuck Fook, I/C No , at Kuala Lumpur on 25 January Dato Lee Tuck Fook Before me: Commissioner for Oaths 96 Pavilion REIT 2017 Annual Report

50 TRUSTEE S REPORT to the Unitholders of Pavilion Real Estate Investment Trust (Established in Malaysia) We have acted as Trustee of Pavilion Real Estate Investment Trust ( Pavilion REIT ) for the financial year ended 31 December In our opinion and to the best of our knowledge, Pavilion REIT Management Sdn. Bhd. ( the Manager ) has managed Pavilion REIT in accordance with the limitations imposed on the investment powers of the Manager and the Trustee under the Deed dated 13 October 2011, the Securities Commission s Guidelines on Real Estate Investment Trusts, applicable securities laws and other applicable laws during the financial year then ended. We have ensured the procedures and processes employed by the Manager to value and price the units of Pavilion REIT are adequate and that such valuation/pricing is carried out in accordance with the Deed and other regulatory requirements. We also confirm that the income distributions declared during the financial year ended 31 December 2017 are in line with and are reflective of the objectives of Pavilion REIT. Final distributions have been declared for the financial year ended 31 December 2017 as follows: 1) Final income distribution of 4.28 sen per unit payable on 28 February For and on behalf of the Trustee, MTrustee Berhad... Nurizan Binti Jalil Chief Executive Officer Selangor, Date: 25 January 2018 Pavilion REIT 2017 Annual Report 97

51 INDEPENDENT AUDITORS REPORT to the Unitholders of Pavilion Real Estate Investment Trust (Established in Malaysia) Report on the Audit of the Financial Statements Opinion We have audited the financial statements of Pavilion Real Estate Investment Trust ( Pavilion REIT ), which comprise the statements of financial position as at 31 December 2017, and the statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, as set out on pages 57 to 95. In our opinion, the accompanying financial statements give a true and fair view of the financial position of Pavilion REIT as at 31 December 2017, and of their financial performance and their cash flows for the year then ended in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards. Basis for Opinion We conducted our audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Financial Statements section of our auditors report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence and Other Ethical Responsibilities We are independent of Pavilion REIT in accordance with the By-Laws (on Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants ( By-Laws ) and the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants ( IESBA Code ), and we have fulfilled our other ethical responsibilities in accordance with the By-Laws and the IESBA Code. Key Audit Matter Key audit matter is a matter that, in our professional judgement, was of most significance in our audit of the financial statements of Pavilion REIT in the current year. This matter was addressed in the context of our audit of the financial statements of Pavilion REIT as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on this matter. Valuation of investment properties Pavilion REIT owns a portfolio of investment properties comprising 3 shopping malls and an office block located in Malaysia. Investment properties represent the single largest category of assets on the statement of financial position. These investment properties are stated at their fair values based on independent external valuations. The valuation process involves significant judgement in determining the appropriate valuation methodology to be used, and in estimating the underlying assumptions to be applied. The valuations are highly sensitive to key assumptions applied i.e. a small change in the assumptions can have a significant impact to the valuation. This is a key audit matter because some of the key assumptions are unobservable and hence, required significant judgement from us. 98 Pavilion REIT 2017 Annual Report

52 Independent Auditors Report to the Unitholders of Pavilion Real Estate Investment Trust (Established in Malaysia) (cont d) Key Audit Matter (cont'd) How the matter was addressed in our audit We performed the following audit procedures, among others: We assessed the Manager s processes for the selection of the external valuers, the determination of the scope of work of the valuers, and assessed the valuations reported by the external valuers. We considered the qualifications and competence of the external valuers vis-à-vis the expert's qualifications, membership of a professional body or industry association, and license to practice. We assessed the valuation methodologies used by the Manager against those applied by external valuers for similar property types. We also considered the other alternative valuation methods commonly used by external valuers. We tested the integrity of rental income data applied in the projected cash flows used in the valuation by comparing them with lease agreements. We challenged the capitalisation rates used in the valuation by comparing them against historical rates and available industry data, taking into consideration comparability and market factors. Where the rates were outside the expected range, we undertook further procedures to understand the effect of additional factors and, held further discussions with the valuers. We also considered the adequacy of the disclosures in the financial statements, in describing the inherent degree of subjectivity and key assumptions in the estimates. This includes the relationships between the key unobservable inputs and fair values, in conveying the uncertainties. Information Other than the Financial Statements and Auditors Report Thereon Pavilion REIT Management Sdn. Bhd. ( The Manager ) of Pavilion REIT is responsible for the other information. The other information comprises the information included in the Annual Report, but does not include the financial statements of Pavilion REIT and our auditors report thereon. Our opinion on the financial statements of Pavilion REIT does not cover the Annual Report and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements of Pavilion REIT, our responsibility is to read the Annual Report and, in doing so, consider whether the Annual Report is materially inconsistent with the financial statements of Pavilion REIT or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of the Annual Report, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Manager for the Financial Statements of Pavilion REIT The Manager is responsible for the preparation of financial statements of Pavilion REIT that give a true and fair view in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards. The Manager is also responsible for such internal control as the Manager determine is necessary to enable the preparation of financial statements of Pavilion REIT that are free from material misstatement, whether due to fraud or error. In preparing the financial statements of Pavilion REIT, the Manager is responsible for assessing the ability of Pavilion REIT to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Manager either intends to liquidate Pavilion REIT to cease operations, or has no realistic alternative but to do so. Pavilion REIT 2017 Annual Report 99

53 Independent Auditors Report to the Unitholders of Pavilion Real Estate Investment Trust (Established in Malaysia) (cont d) Auditors Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements of Pavilion REIT as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with approved standards on auditing in Malaysia and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: i) Identify and assess the risks of material misstatement of the financial statements of Pavilion REIT, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ii) Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control of Pavilion REIT. iii) iv) Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Manager. Conclude on the appropriateness of the Manager s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability of Pavilion REIT to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the financial statements of Pavilion REIT or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause Pavilion REIT to cease to continue as a going concern. v) Evaluate the overall presentation, structure and content of the financial statements of Pavilion REIT, including the disclosures, and whether the financial statements of Pavilion REIT represent the underlying transactions and events in a manner that gives a true and fair view. vi) Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within Pavilion REIT to express an opinion on the financial statements of Pavilion REIT. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the Manager regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Manager with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Manager, we determine those matters that were of most significance in the audit of the financial statements of Pavilion REIT for the current year and is therefore the key audit matter. We describe this matter in our auditors report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our auditors report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 100 Pavilion REIT 2017 Annual Report

54 Independent Auditors Report to the Unitholders of Pavilion Real Estate Investment Trust (Established in Malaysia) (cont d) Other Matter This report is made solely to the unitholders of Pavilion REIT in accordance with the trust deed of Pavilion REIT and for no other purpose. We do not assume responsibility to any other person for the content of this report. KPMG PLT (LLP LCA & AF 0758) Chartered Accountants Petaling Jaya Date: 25 January 2018 Chan Kam Chiew Approval Number: 2055/06/18(J) Chartered Accountant Pavilion REIT 2017 Annual Report 101

55 ANALYSIS OF UNITHOLDINGS Distribution of Unitholdings as at 31 December 2017 Size of Unitholdings No. of Unitholders % of Unitholders No. of Units % of Unitholdings Less than ,000 1, , ,001-10,000 2, ,413, , , ,622, ,001 to less than 5% of issued units ,283, % and above of issued units ,210, Total 5, ,030,093, Thirty largest unitholders as per record of depositors as at 31 December 2017 No Name of Unitholders No. of Units % 1. HSBC Nominees (Asing) Sdn Bhd CS (Switz) for Qatar Holding LLC 2. Maybank Nominees (Tempatan) Sdn Bhd Pledged Securities Account for Lim Siew Choon (432218) 3. Maybank Nominees (Tempatan) Sdn Bhd Pledged Securities Account for Tan Kewi Yong (129118) 4. Amanahraya Trustees Berhad Amanah Saham Bumiputera 5. Citigroup Nominees (Tempatan) Sdn Bhd Employees Provident Fund Board 1,082,900, ,325, ,775, ,343, ,434, Kumpulan Wang Persaraan (Diperbadankan) 57,335, DB (Malaysia) Nominee (Asing) Sdn Bhd BNYM SA/NV for Newton Asian Income Fund 8. Citigroup Nominees (Tempatan) Sdn Bhd Exempt an for AIA Bhd 54,169, ,663, Valuecap Sdn Bhd 39,301, HSBC Nominees (Asing) Sdn Bhd BBH and Co Boston for Asia REIT Master Fund 11. Amanahraya Trustees Berhad Amanah Saham Wawasan ,560, ,000, Cartaban Nominees (Asing) Sdn Bhd Exempt an for State Street Bank & Trust Company (West CLT OD67) 13. Malaysia Nominees (Tempatan) Sendirian Berhad Great Eastern Life Assurance (Malaysia) Berhad (LSF) 14. Malaysia Nominees (Tempatan) Sendirian Berhad Great Eastern Life Assurance (Malaysia) Berhad (Par 3) 15. Malaysia Nominees (Tempatan) Sdn Bhd Maybank Trustees Berhad for Public Regular Savings Fund (N ) 14,533, ,169, ,000, ,388, Pavilion REIT 2017 Annual Report

56 Analysis of Unitholdings (cont d) Thirty largest unitholders as per record of depositors as at 31 December 2017 (Cont d) No Name of Unitholders No. of Units % 16. HSBC Nominees (Asing) Sdn Bhd JPMCB NA for Vanguard Total International Stock Index Fund 10,304, Citigroup Nominees (Tempatan) Sdn Bhd Employees Provident Fund Board (CIMB PRIN) 18. HSBC Nominees (Tempatan) Sdn Bhd HSBC (M) Trustee Bhd for Allianz Life Insurance Malaysia Berhad (P) 10,269, ,771, Pavilion REIT Management Sdn Bhd 9,725, Amanahraya Trustees Berhad Amanah Saham Malaysia 21. Cartaban Nominees (Tempatan) Sdn Bhd PAMB for Prulink Equity Fund 8,749, ,038, DB (Malaysia) Nominee (Asing) Sdn Bhd BNYM SA/NV for Newton Emerging Income Fund 7,558, Amanahraya Trustees Berhad PB Growth Fund 24. HSBC Nominees (Asing) Sdn Bhd Six SIS for B&I Pan-Asian Total Return Real Estate Securities Fund 25. HSBC Nominees (Asing) Sdn Bhd BBH and Co Boston for Vanguard Emerging Markets Stock Index Fund 26. HSBC Nominees (Tempatan) Sdn Bhd HSBC (M) Trustee Bhd for Zurich Insurance Malaysia Berhad (Life Par) 27. HSBC Nominees (Asing) Sdn Bhd JPMCB NA for Jupiter Emerging and Frontier Income Trust PLC 28. Citigroup Nominees (Tempatan) Sdn Bhd Employees Provident Fund Board (Amundi) 29. Citigroup Nominees (Tempatan) Sdn Bhd Kumpulan Wang Persaraan (Diperbadankan) (CIMB Equities) 7,479, ,376, ,381, ,339, ,327, ,000, ,594, Amanah Trustees Berhad As 1Malaysia 5,001, Pavilion REIT 2017 Annual Report 103

57 Analysis of Unitholdings (cont d) Major Unitholders (5% and above) as at 31 December 2017 No Name of Unitholders Direct Interest No. of Units % Deemed Interest No. of Units 1. Qatar Holding LLC 1,082,900, % 2. Tan Sri Lim Siew Choon 845,425, Puan Sri Tan Kewi Yong 281,875, Unitholdings of Directors and Chief Executive Officer as at 31 December 2017 No Name of Unitholders Direct Interest No. of Units % Deemed Interest No. of Units 1. Tan Sri Lim Siew Choon 845,425, % 2. Puan Sri Tan Kewi Yong 281,875, Dato Lee Tuck Fook 100,000 * 4. Navid Chamdia 100,000 * 5. Ooi Ah Heong 100,000 * 6. Dato Mohzani bin Abdul Wahab 100,000 * 7. Dato Maznah binti Abdul Jalil 100,000 * 8. Philip Ho Yew Hong 95,000 * *: Negligible 104 Pavilion REIT 2017 Annual Report

58 MARKET OVERVIEW GENERAL ECONOMIC OVERVIEW 2017 Based on the latest report released by Bank Negara Malaysia (BNM) for Q3 2017, the Malaysian economy is estimated to have grown strongly by 6.2% in the third quarter, up from 5.8% the previous quarter, leading BNM to forecast the GDP growth for 2017 to be at the upper end of the official growth projections - between 5.2% and 5.7%. The economic growth is supported by strong domestic demand as well as exports due to the favourable global conditions. For 2018, the Ministry of Finance has projected a growth of between 5.0% and 5.5% whilst the International Monetary Authority (IMF) has made a similar forecast Q Forecast 2018 Annual Growth Rate (%) Ra te (%) Chart 1: Malaysia Annual GDP Growth Rate (%) Source: BNM Crude oil prices started the year on a positive note with average prices (WTI) closing at US$53.59/bbl on 31 January before plunging mid-year to US$46.17/bbl on 30 June. Since then, OPEC and Russia, the major oil exporters, have reached an agreement to cut production and this helped to push prices back up to US$58.36/bbl as at 1 December. Nevertheless, the recovery of crude oil prices may stimulate an increase in production of US shale oil and this may impede the effect of the production cut agreement. Chart 2: WTI (Nymex) Crude Oil Prices 2017 Source: Nasdaq The manufacturing sector enjoyed strong growth, driven by both export-oriented industries led by the good performance of the electrical and electronics sector as well as domestic-oriented industries supported by the food-related as well as building materials sectors. Pavilion REIT 2017 Annual Report 105

59 Market (cont d) In terms of consumption and investment, private consumption rose 7.2% in Q (up from 7.1% in Q2) whilst private investments went up by 7.9% (7.4% in Q2). Public consumption on the other hand expanded by 4.2% in Q3 (3.3% in Q2) whilst public investments recovered with a 4.1% growth compared to a decline of 5% in Q2. FDI inflows into the country for the first nine months of the year is set to match the previous year s record high. Headline inflation has declined steadily from 4.3% in Q1 to 4.0% in Q2 and 3.8% in Q3 but is expected to remain at elevated levels in the immediate term due to rising oil prices. The Ringgit continued to improve against the greenback and Singapore dollar and was the best performing currency over two consecutive quarters since Q THE RETAIL SECTOR Klang Valley Retail Supply In 2017 Total Retail Supply And Demand As at December 2017, Klang Valley (including Kuala Lumpur, Selangor and Putrajaya) had 262 shopping centres with a total retail supply of about 74.3 million square feet. The average occupancy rate of these shopping centres dropped for the second consecutive year from 79.9% in 2016 to 78.3%. The total retail supply in Kuala Lumpur, Selangor and Putrajaya is as detailed out in the table below: Table 1: Retail Supply in Klang Valley, 2017 Chart 3: Malaysia s GDP Growth Source: BNM / MOF No. Location No. of Malls # Total Nett Floor Area (square feet) Average Rental Rate (RM per square feet per month)* Average Occupancy Rate (%) 1 Kuala Lumpur ,538, Selangor ,838, Putrajaya 3 1,957, TOTAL ,334, # - includes hypermarket malls and arcades * - excludes rental rates of anchor tenants such as supermarket, department store, cineplex, bowling alley, etc. Source : Henry Butcher Retail/ 2H2017 Property Market Report, NAPIC The average rental rate for Klang Valley declined for the second consecutive year from RM9.21 per square feet per month in 2016 to RM8.97 per square feet per month in This average did not include rental rates of anchor tenants such as supermarket, department store, cineplex, bowling alley etc. For the year of 2017, Klang Valley shopping centres were still facing more or less the same challenges in higher operation costs, reduced shopping traffic, decreased retail sales and early termination of tenants. Once again, it took longer to secure new tenants to fill vacant lots. 106 Pavilion REIT 2017 Annual Report

60 Market (cont d) As in the previous year, many shopping centre owners needed to introduce rental rebates or reduce rental rates in order to retain existing tenants. Shopping centres that suffered from low occupancy rates in 2016 were able to fill up more retail lots. Their occupancy rates improved this year. On the other hand, new shopping centres that opened this year faced difficulty to secure new tenants to take up their retail shops. Numerous shopping centres scheduled for opening in 2017 were delayed to the following year. They include M Square, Selayang StarCity Mall, Bangsar Trade Centre, Evo Mall, KL Eco City Mall, Pacific Star and The Shoppes at Four Seasons Place. New Openings in 2017 Table 2: New shopping centres opened in 2017 Name Location Net Lettable Area Anchor Tenant Occupancy Rate (%)* (square feet) MyTown Cheras 1,100,000 Parkson 90 KL Gateway Mall Bangsar 350,000 Jaya Grocer 85 Melawati Mall Melawati 620,000 Village Grocer / GSC 90 Empire City Mall Damansara 1,800,000 Parkson/ Ice Skating 25 Ring Eight Kinrara Bandar Kinrara 70,000 Anytime Fitness 60 KIP Mall Sepang 250,000 Econsave / Mr DIY 80 Centrus Mall Cyberjaya 200,000 None 5 Amerin Mall Balakong 155,000 SKM Mkt/ Amerin **NA Cineplex TOTAL 4,545,000 * - occupancy rates were estimated based on observation studies carried out before 15 December 2017 **- Amerin Mall was opened on 15 December Source: Henry Butcher Retail A total of 8 shopping centres opened in 2017: After much delay, MyTown shopping mall in Cheras opened in early It is anchored by Parkson, Village Grocer and GSC cineplex. It opened the mall with numerous empty lots, but they were taken up and opened over the months. It is the second largest shopping centre opened this year. KL Gateway, located at the main entrance of Bangsar South, opened in early This retail podium of a mixed-use development is anchored by Village Grocer. Melawati Mall, located within Melawati commercial centre, opened to the public during the middle of It is anchored by Village Grocer, GSC cineplex and Fitness First. The largest shopping mall that opened in 2017 is Empire City Mall with 1.8 million square feet of nett floor area. This mall was supposed to open in 2015, but was delayed several times. The ice-skating rink and several F&B outlets in Empire City Mall were ready in time for the SEA Games held in August The remaining part of this mega shopping mall has yet to be open to public. Other anchor tenants include Parkson, CJ CGV Cinemas, VR park and a large bowling alley. Eight Kinrara, a small neighbourhood shopping centre in Bandar Kinrara, struggled to find tenants initially. It is now tenanted by Anytime Fitness, Maybank, F&B outlets and retail tenants. KIP Mall Kota Warisan is located in a new growth area of Sepang. It was opened in August 2017 with Econsave as the main anchor tenant. Centrus Mall in Cyberjaya was completed and opened to the public in Only a few tenants are found in this new retail centre. Amerin Mall in Balakong is the latest shopping centre opened that before the end of It is tenanted by SKM Market, Amerin Cineplex, an event hall, F&B outlets and retail tenants. Pavilion REIT 2017 Annual Report 107

61 Market (cont d) KLANG VALLEY SHOPPING CENTRE PERFORMANCES IN 2017 Shopping Centre Market Similar to 2016, the main challenges for Klang Valley shopping centres in 2017 are reduced consumer spending and rising operation costs. Compared to 2 years ago, though consumers were still frequenting shopping malls, (especially during weekends, in large shopping malls), there were less purchases made. Major Challenges Shopping centre owners were facing higher operation costs (air-conditioning, security, cleaning and staff costs) during the year. Yet they are not able to increase their rental rates any higher as compared to Shopping centre owners still needed to offer monetary incentives (including lower rental, longer rent-free period, subsidised renovation costs etc) in order to attract reputable tenants to open shops in their shopping centres. The most important problem faced by shopping malls in Klang Valley in 2017 was the severe reduction in consumers spending due to rising cost of living and weak economic conditions. This was the main reason that led to drops in average occupancy rate and average rental rate in This affected even the most popular shopping centres in Klang Valley. The second challenge is oversupply. Klang Valley has been facing retail oversupply for the last 8 years. However, oversupply was location-specific, prominent in areas like Kuala Lumpur city centre, Petaling Jaya, Damansara, Cheras etc, but not apparent in areas like Klang, Bangi, Kajang and Kepong. Many shopping centres in Klang Valley had been facing higher vacancy rates since the beginning of This situation had stabilised during the second half of Landlords had been proactive to improve the occupancy rates of their malls, including offering attractive rental packages. Acquisition, Refurbishment and Closure In early 2017, Pelaburan Hartanah Bhd (PHB) bought Empire Shopping Gallery in Subang Jaya for RM570 million. In June 2017, AEON Co (M) Bhd announced that it will sell AEON Mahkota Cheras shopping centre to Foremost Wealth Management Sdn Bhd for RM87.8 million. LBS Bina Group Bhd acquired M3 Mall in Gombak for RM105 million in September IPC Mall in Damansara undertook major refurbishment and completed recently with new interior and new tenants. Sogo KL in Kuala Lumpur city centre refurbished its exterior facade and internal layouts while remaining open. Kompleks Pertama in Kuala Lumpur city centre undertook refurbishment to improve its building facades. Subang Avenue completed its refurbishment and is ready for its new opening in early To fight against new competition in its immediate vicinity, AEON Taman Maluri is building a new extension at its open car parking area. The Sphere in Bangsar South was closed for redevelopment during the middle of The new retail centre will be reopened in early The Malaysian government paid about RM300 million to acquire Ampang Park from strata lot owners to develop the second MRT line. Ampang Park was the first shopping centre opened in Kuala Lumpur 44 years ago which is targeted for demolishment by next year. Pandan Safari in Pandan Perdana, Lucky Plaza Bandar Park in Old Klang Road and SSTwo Mall in Petaling Jaya were closed for refurbishment and redevelopment during the last 2 years but they have yet to re-open to public. 108 Pavilion REIT 2017 Annual Report

62 Market (cont d) Freeze on Shopping Centre Development In a recent published report by Bank Negara of Malaysia, there is a glut of retail space in Malaysia. In response to this report, the government stopped all new applications to build shopping centres. However, in December 2017, the Malaysian government decided to relax this ruling. No detailed guidelines have been published to-date. KLANG VALLEY RETAIL MARKET 2017 was another disappointing year for Klang Valley retailers. This was due to weak consumer spending, intense competition, depreciated currency and rising cost of retail operation. Major Challenges During the Year The main challenges for Malaysia retail industry in 2017 were more or less the same as Major challenges of retailers in Malaysia were: Weak consumers spending Low consumers confidence level Rising cost of operation Retailers did not witness significant improvement in consumers spending during the year. Despite better economic performance during the year, many Malaysian consumers did not enjoy higher take-home pays. The currency depreciation since early 2016 has been affecting retailers in costs of retail goods. Retailers profit margin had been severely affected by the higher costs of imports on raw materials, unfinished goods and retail goods. Malaysian currency depreciation for the last 2 years had also led to higher cost of living for every Malaysian. GCH Retail (Malaysia) Sdn Bhd announced the closure of 5 Giant hypermarkets and supermarkets by November 2017 after its leases expired. These outlets were located in Kuala Lumpur, Selangor, Kedah, Perak and Sarawak. In addition, Super Seven replaced Giant hypermarket located within Viva Home Mall in Cheras during the middle of Quarterly Retail Sale Performances For the first quarter of 2017, Malaysia s retail industry recorded a disappointing growth rate of -1.2% in retail sales, as compared to the same period in 2016 (refer to Table 3 below). As compared to the same quarter a year ago, the retail industry contracted by 4.4% due to strong pre-gst sales in Unfortunately, it had yet to recover. This poor quarterly growth rate was also due to weak Chinese New Year sales in January Shoppers were careful in their spending on festive goods. In addition, prices of retail goods continued to rise since the beginning of 2017, mainly due to our weak Malaysian currency and higher fuel prices. Average pump price for RON95 during the first quarter of 2017 was the highest since the implementation of managed float system in December Pavilion REIT 2017 Annual Report 109

63 Market (cont d) Malaysian consumers turned cautious as they were burdened by higher cost of living. Table 3: Malaysia Retail Industry Growth Rate, 2017 Quarter % Growth Rate First -1.2 Second 4.9 Third -1.1 Fourth 4.5 (e) Average 2.2 (e) (e) - estimate Source: Retail Group Malaysia For the second quarter of 2017, Malaysia retail industry reported an encouraging growth rate of 4.9% in retail sales, as compared to the same period in After a dismaying performance in the first 3 months of this year, the retail industry managed to recover slightly during the second quarter. The Hari Raya festival that began end of May boosted retail sales during this period. Malaysian consumers shopped more with heavy price discounts offered by retailers located throughout the country. For the third quarter of 2017, the Malaysian retail industry reported another disappointing result. For this quarter, retail sales declined by 1.1% as compared to the same period in After a short recovery during the second quarter of this year, retail sales slid into red again in this quarter. The retail industry failed to bounce back from the poor performance during the same period in 2016 (1.9% in third quarter of 2016). The early Hari Raya festival this year (in June 2017 as compared to July 2016) partly contributed to the lower retail sale. Despite strong economic performance during the third quarter, majority of consumers did not receive higher take-home pays. The propensity to spend was not high as reflected in the decline in Consumer Sentiment Index during the same period. Rising cost of living had also deteriorated the purchasing power of Malaysian consumers. Fourth quarter 2017 growth rate s estimate had been revised from 5.5% to 4.5% recently, taking into consideration the growth of 0.3% achieved during the same period a year ago. With consideration of the latest results, Retail Group Malaysia (RGM) revised its annual growth forecast from 3.7% to 2.2% for Malaysia retail industry in This was the third revision since end of Major Retail Trends During the Year This year, Klang Valley retailers faced another major threat - the rapid rise of e-commerce. Foreign and Malaysian online retailers enjoyed a fruitful year with several major shopping events including #MyCyberSale, Double 11 Single Day and Double 12 Celebration. For the first time, #MyCyberSale was jointly organised by Malaysian Digital Economy Corporation (MDEC) and National ICT Association of Malaysia (Pikom). This 5-day event also broke a record for participation by 1,000 online merchants. Another major development in the Klang Valley retail industry is the rapid spread of cashless payment systems. With smartphone ownership in Malaysia accounting for 70% of total handphone ownership, more retailers in Klang Valley are accepting mobile wallet payment (such as Alipay, Samsung Pay, Visa Pay, Apple Pay, etc.). The price of smartphones are also getting cheaper. This new method of payment will be widely accepted by Malaysian consumers in the short term. 110 Pavilion REIT 2017 Annual Report

64 Market (cont d) Opening and Closure of Foreign Retailers in Klang Valley During the year, Klang Valley s retail market suffered closures of several overseas retailers. They include Nature Republic, Tours les Jour, Hello Kitty Cafe, Bulgogi Brothers, Pumpkin Patch, Tim Ho Wan and Aeropostale. These retailers closed down mainly due to intense competition and higher cost of retail operation. Despite several major closures, many overseas retailers continued to choose Klang Valley shopping centres to open their first outlets in Malaysia. They include at least 43 brands (in Klang Valley shopping centres only) from 15 countries: Table 4: New Foreign Retailer Entrants No. Country of Origin Brand Name Trade 1 Australia Pie Face F&B 2 Spetta F&B 3 King Living Furniture 4 China HLA Fashion 5 JiuQiu Bookstore 6 Denmark Jack & Jones Fashion 7 Vero Moda Fashion 8 Dubai Juiceco F&B 9 France Sergent Major Fashion 10 Marche Movenpick F&B 11 Louis Quotorze Fashion 12 Laduree F&B 13 Hong Kong Honolulu Cafe F&B 14 Italy Off-White Fashion 15 Japan Pokemon Cafe F&B 16 Owndays Lab Optical 17 Mitsuyado Seimen F&B 18 Yamazaki Bakery F&B 19 Jalan Jalan Japan Discount store 20 Singapore Koi F&B 21 Hillstreet Coffee Shop F&B 22 The Dark Gallery F&B 23 Tender Fresh F&B 24 South Africa Galito s F&B 25 South Korea Shinmapo F&B 26 Kiss the Tiramisu F&B 27 Juicy F&B 28 Softree F&B 29 Isaac Toast F&B 30 Yoogane F&B Pavilion REIT 2017 Annual Report 111

65 Market (cont d) No. Country of Origin Brand Name Trade 31 Taiwan City Milk F&B 32 Sunny Cha F&B 33 Fruit Ninja at Dochi F&B 34 DaYung F&B 35 Dream Colour F&B 36 Thailand Xugar F&B 37 Cafeayan F&B 38 Tearoi F&B 39 Turkey LC Waikiki Fashion 40 United States WingStop F&B 41 Rebecca Minkoff Fashion 42 Wayback Burger F&B 43 TR Fire Grill F&B Source: Retail Group Malaysia TOURIST ARRIVALS Malaysia targeted to attract 32 million tourist arrivals in The weakened Malaysian currency since early 2016 encouraged more foreign tourist arrivals during the year. However, it is unlikely to meet its target for the year. Effective from 1 September 2017, a flat rate of RM10.00 per room per night is charged on foreign tourists staying in all types of hotel rooms in Malaysia. Nevertheless, this tourism tax is unlikely to have major impact on international tourist arrivals to Malaysia. Thus, it does not have significant negative impact on tourism shopping. During the year, 2 major events took place in the country. Malaysia hosted the 2017 SEA Games and ASEAN PARA Games. It was estimated that these events attracted 700,000 foreign visitors. The visa-waiver programme for Chinese tourists has also attracted more arrivals from this country. 4 million Chinese tourist arrivals was the target set for Introduced in 2016, this programme led to a 27% increment in visits from China. For the first 5 months of this year, this market registered a growth of 7.8% was also the final year for Malaysia to host the Formula One race in Sepang International Circuit. Malaysia had been organising this international motor race event since Pavilion REIT 2017 Annual Report

66 Market (cont d) RENTAL RATES OF SELECTED SHOPPING CENTRES IN KLANG VALLEY Shopping centres in Klang Valley registered a slight decline in achieved rental rates in Many landlords offered rental rebates and a longer rent-free period to existing and prospective tenants instead of reduction in rental rates. The rental rates of selected shopping centres in Klang Valley are detailed out in the table below: Table 5: Rental Rates of Selected Shopping Centres in Klang Valley, 2017 Name Rental Rate (RM per square feet per month) Lower Ground Ground Floor First Floor Second Floor Third Floor Fourth Floor Suria KLCC Low Yat Plaza Cheras Leisure NA NA Mall Mid Valley NA Megamall S u n w a y NA Pyramid The Mines NA SACC Mall NA NA not applicable Source : Property Market Report, NAPIC / Henry Butcher Retail Pavilion REIT 2017 Annual Report 113

67 Market (cont d) KLANG VALLEY RETAIL SUPPLY IN 2018 At least 17 shopping centres are expected to open in 2018 with a total nett floor area of almost 6.0 million square feet. They are located in all parts of Klang Valley. Table 6: New Shopping Centres in Klang Valley for the Year 2018 No. Name Location Nett Floor Area (square feet) 1 KL Eco City Mall Pantai 250,000 2 Bangsar Trade Centre Pantai 100,000 3 M Square Puchong 186,000 4 Pacific Star Petaling Jaya 350,000 5 Selayang StarCity Mall Selayang 550,000 6 Shoppes at Four Seasons Place KL city centre 300,000 7 Evo Mall Bangi 250,000 8 USJ Wholesale City Mall Subang Jaya 100,000 9 GM Bukit Bintang Pudu 122, Eko Cheras Cheras 800, Kiara 163 Mont Kiara 210, Menara Dayabumi Kuala Lumpur CBD 120, Tropicana Garden Mall Kota Damansara 1,000, One Kesas Concept Mall Klang 150, Central i-city Mall Shah Alam 940, The Sanctuary Mall Shah Alam 130, Horizon Village Outlet Sepang 400,000 TOTAL 5,958,000 Source: Henry Butcher Retail 41% of them are located in Kuala Lumpur and the other 59% are located in Selangor. 9 of them (53%) were supposed to open in 2017 but were delayed to KL Eco City Mall is targeted to open by the first quarter of A collaboration with Jaya Grocer, this mall will open a 54,000 square feet Bangsar Mart. The Shoppes at Four Seasons Place is located next to Suria KLCC. It has secured Robinsons as its anchor tenant and is slated to open by March Evo Mall, a joint venture development between PKNS and Andaman Development Sdn Bhd, has confirmed Parkson and a Japanese supermarket as its anchor tenants. GM Bukit Bintang at The Robertson, a 10-storey fashion wholesale mall next to Pudu Sentral, will open by the second quarter of This mall is a joint venture between GM Group and Gamuda Land. The mall at Kiara 163 is scheduled to open by the middle of The developer was reported to have secured 80% take-up rate. Anchor tenant is Jaya Grocer. Central i-city Mall in Shah Alam is targeted to open by October Sogo has been confirmed as its main anchor tenant. 114 Pavilion REIT 2017 Annual Report

68 Market (cont d) OUTLOOK OF KLANG VALLEY SHOPPING CENTRE MARKET IN 2018 Similar to 2017, the weak economic outlook, rising cost of living and increasing retail supply will affect the shopping centre market in Klang Valley next year. Klang Valley Consumer Market Retail Group Malaysia forecasts Malaysia retail industry growth rate in 2018 to be at 6.0%. Three key factors that will affect retail sales in 2018: General election before middle of this year. This will stimulate economic activity and boost consumers confidence level. Ringgit against US$ returning to 2014 levels before end of next year Strong and sustainable economic data in China and United States for next year. Consumers spending is directly linked to economic performance. When the economy is performing well and benefits all business and industrial sectors, consumption will increase. Klang Valley Shopping Centre Market Consumers are still visiting shopping malls large malls in particular, especially during weekends. However, as compared to 2 years ago, less purchases were made. Visiting shopping centres is a lifestyle of Malaysian consumers, especially during the weekends. It is a family outing, a friends gathering place, a movie day, a relaxation spot with free air-conditioning, an exciting place to see nice things, and a one-stop centre for grocery shopping, fashion buying, dining and entertainment. Therefore, shopping traffic to major shopping centres in Klang Valley is not expected to decline. Similar to many new shopping centres having opened during the last 2 years, shopping centres targeted to open in 2018 will face challenges to fill up most of their retail lots upon their openings. To attract tenants, they will need to lower their rental rates in order to lure them. Target Tourist Arrivals Malaysia targets to attract 28 million tourist arrivals in During Budget 2018 (announced in October 2017), RM3.8 billion has been allocated to promote and enhance tourism facilities in A sum of RM2.0 billion has been provided under SME Tourism Fund to give soft loans to tour operators with an interest subsidy of 2%. An additional RM1.0 billion will be given to Tourism Infrastructure Development Fund as soft loans. Another RM500 million will be used to promote tourism through upgrading infrastructure facilities as well as promoting homestay and eco-tourism programmes. To promote medical tourism in Malaysia, the government is allocating RM30 million to Malaysian Healthcare Travel Council to implement initiatives to promote the country as the Asian hub for fertility treatment with evisa facility to be extended to cover other specialised medical services and high-value healthcare packages. Malaysian government will also introduce Flagship Medical Tourism Hospital Programme which offers special incentive to private hospitals to attract overseas medical tourists. Pavilion REIT 2017 Annual Report 115

69 Market (cont d) PURPOSE BUILT OFFICE SECTOR Existing & Incoming Supply The supply of purpose built office space in Kuala Lumpur increased to approximately 94 million square feet (8.738 million square metre) in the first half of 2017, based on the latest available statistics from NAPIC. There is another 6.5 million square feet (599,762 square metre) of incoming supply which will add onto the space available. Outside Kuala Lumpur, there is a stock of about 22.8 million square feet (2.114 million square metre) supplied by buildings in Putrajaya whilst Selangor contributes approximately 37 million square feet (3.437 million square metre). Table 7: Existing Supply of Office Spaces (square metres) in Kuala Lumpur & Selangor as at Q State Existing Supply Completed Incoming Supply Planned Supply New Planned Supply Kuala Lumpur 8,738, , , , ,488 W.P. Putrajaya 2,114, ,679 31,545 0 Selangor 3,437,013 42, ,611 10,276 10,276 Total 14,289, ,791 1,529, , ,764 Source: NAPIC Based on the latest available detailed space breakdown provided by NAPIC for Q1 2017, nearly 30% of the office space is located within the premier KLCC / Golden Triangle area (KLCC/GT) whilst close to 15% is located within the older Central Business District (CBD). The bulk (approximately 34%) of the existing supply are in buildings located within the city centre (WCC) but outside the KLCC / GT and CBD whilst suburban commercial hubs contribute the balance 21%. Table 8: Existing Supply of Office Space by Districts in Kuala Lumpur as at Q Area No. of Buildings Existing Supply (Square Metres) % of Supply Occupancy Rate (%) KLCC/Golden Triangle 91 2,600, CBD 90 1,275, WCC 143 2,994, Suburban 111 1,840, Total 435 8,711, There are a number of major office developments due for completion over the next few years as listed below: 116 Pavilion REIT 2017 Annual Report

70 Market (cont d) Table 9: New Office Buildings Due for Completion >2019 Building Location NLA (square feet) Estimated Completion Kuala Lumpur KL Eco City Abdullah Hukum 2017 Tower 1 Tower 2 Tower 3 Boutique offices 700, , , ,000 Menara Public Mutual Jalan Raja Chulan 420, South Point Mid Valley City 958, Equatorial Plaza Jalan Sultan Ismail 470, / 19 Etiqa Insurance Bangsar 390, / 19 The Exchange 106 (Mulia) TRX Jalan Tun Razak 2,650, Menara Prudential TRX Jalan Tun Razak 560,000* GFA 2018 Affin Bank New HQ TRX Jalan Tun Razak 823,500 After 2019 HSBC New HQ TRX Jalan Tun Razak 568,000 After 2019 Merdeka PNB 118 Stadium Merdeka / Chinatown 1,700, Total 10,879,500 Petaling Jaya Mercu Mustapha Kamal 1 & 2 Damansara Perdana 290, ,000 Menara Star Pacific Star Petaling Jaya 270, Empire City Empire City Damansara, PJ HCK Tower Block H 347, PJ Sentral Celcom MBSB MyIPO PKNS Section 52, Petaling Jaya 450, , , , onwards Paramount Tower 1 & 2 Jalan Universiti PJ 572,000 After 2018 One City Phase 3 USJ 1,500,000 After 2018 Uptown 8 Damansara Uptown 450,000 After 2018 PJCC PJ 290,000 After 2018 Petaling Tin redevelopment PJ 300,000 After 2018 MRCB PJ 184,000 After 2018 i-city Corporate tower 1 & 2 Shah Alam 2,080,000 After 2018 Fraser Square Section 13 PJ 240,000 After 2018 Total 8,830,000 Grand Total 19,709,500 Source: Henry Butcher Research Pavilion REIT 2017 Annual Report 117

71 Market (cont d) Apart from the projects mentioned above, there are a few other major office developments which are part of massive integrated commercial developments in the city which have been announced and which, if launched and completed, will add significantly to the future supply of office space in Kuala Lumpur. Some of these projects involved demolishing old buildings and redeveloping the sites to take advantage of higher plot ratios now allowed by the authorities: Lot 185 KLCC 500,000 square feet of retail & office space & a hotel Pavilion Damansara Heights 10 corporate towers with floor areas of between 75,000 and 234,000 square feet Bukit Bintang City Centre (BBCC) by Eco World Group Former Brickfields District HQ Seni Nadi Tradewinds Square, Jalan Sultan Ismail (redevelopment of Kompleks Antarabangsa & Crowne Plaza Hotel) proposed 110-storey corporate tower, 61-storey mixed use tower and a retail mall Tradewinds Towers 50 and 26-storey office towers to be built on the former Menara Tun Razak site, Jalan Raja Laut New 80-storey office tower to add onto Menara Dayabumi Bandar Malaysia Office Occupancy Rates & Rentals The office occupancy rates provided by NAPIC s report for Q do not show the detailed breakdown for Kuala Lumpur according to areas but overall, the figures indicate that the occupancy rate has improved to 81.4% with buildings located within the city centre enjoying a higher occupancy than those outside the city centre. Meanwhile, the occupancy rates of office buildings in Putrajaya was reported to be 52.6% as at Q whilst in Selangor the figure is 74.7%. Nevertheless, the substantial supply of office space due to come onto the market is expected to result in vacancy rates rising significantly and this has prompted Bank Negara Malaysia in its report for Q3 2017, to issue a warning of an impending glut of office space which may result in 1 in 3 offices to be vacant by This has led to the government deciding to impose a blanket freeze on all new approvals of office buildings as well as shopping malls and luxury condominiums priced above RM1 million. However, the authorities have since then relaxed the freeze and developments which can be justified by the developers will now be allowed. Chart 3: Supply and Occupancy Rates of Office Buildings in Kuala Lumpur (2005 to 1H 2017) Source : NAPIC Chart 4: Supply and Occupancy Rates of Office Buildings in Selangor (2005 to 1H 2017) Source: NAPIC 118 Pavilion REIT 2017 Annual Report

72 Market (cont d) Overall, average rentals in the various sub-markets in Kuala Lumpur s office sector registered a slight decline. We note that newly completed buildings which have just come onto the market are of better specifications and therefore fetch higher rentals and this could have propped up the average rentals. Further, the rentals have not taken into account the incentives offered by the new buildings eg. longer rent free periods. Older buildings which have not carried out any refurbishment exercises are affected by the stiff competition and some have lowered their rentals to arrest the drop in occupancy rates as tenants are enticed by the attractive rentals and incentives offered to relocate to the newer and better quality buildings. Table 10: Range of Office Rentals (2016) Location Rental range (RM per square feet per month) KLCC / GT Grade A Grade A Grade B CBD Grade A Grade B WCC Suburbs Source: HBM Research Major Office Sales Transactions There were not many transactions of office buildings in The following were the major transactions that were noted. The highest price per square feet was recorded by the sale of Menara Selangor Dredging at RM1,323 per square feet. Table 11: Major Office Transactions in 2017 Building NLA (square feet) Consideration (RM) Price, RM per square feet Vista Tower, The Intermark 551, million 824 Menara Prudential 164, million 759 The Paradigm 1 million (gross floor area 321 million including retail space) Menara Selangor Dredging 362, million 1,323 Source: Henry Butcher Research Pavilion REIT 2017 Annual Report 119

73 Market (cont d) Outlook for Office Sector The supply of office space has increased substantially over the past six years and this has raised concerns of a serious glut which may have a drastic impact on the office market. Newly completed buildings are taking a longer time to fill up and more incentives have to be offered to attract tenants. Older buildings which have not been upgraded to meet the needs of modern businesses lose out as tenants take advantage of the attractive rents and incentives to relocate to newer buildings with better amenities and higher quality specifications. As vacancy rates rise, rentals have come under pressure. The completion and commencement of the MRT line as well as new LRT extensions have made areas which are served by the enhanced public transportation links more attractive as office locations and this has spurred the trend of decentralization as well as flight to better quality new buildings in city fringe areas like Damansara Heights and Mutiara Damansara / Damansara Perdana. Rentals have weakened in the face of higher vacancy rates and although generally still stable, will come under increased pressure when the huge supply of space from the few mega projects undertaken by the government link companies eg Merdeka PNB 118 and TRX are completed in the coming years. The alarm bells raised by Bank Negara Malaysia of the glut in supply and the ramifications it has on the market as well as the banks which finance these projects have put all the stakeholders on high alert. The government s proposed freeze on new approvals, if enforced, will help to avoid worsening the oversupply situation and buy some time to allow the market to digest the new supply. Burdened by these structural issues, the outlook for the office market certainly looks challenging in the coming year. THE MALAYSIAN REITS (M-REITS) MARKET OVERVIEW 2017 There are currently 18 REITs listed on Bursa Malaysia, one more than the previous year. The largest REIT by market capitalization as at end 2017 is still KLCCP which maintained its top position at RM15.6 billion followed by IGB REIT at RM 6.32 billion, Sunway REIT at RM5.595 billion and Pavilion REIT at RM4.878 billion. There are five other REITs which have market capitalizations of above RM1 billion viz-a-viz, Capitaland Malaysia Mall Trust, YTL Hospitality, Axis Real Estate, MRCB-Quill and Al-Aqar Healthcare. It is noted that only seven out of the eighteen REITS (it was nine out of seventeen in 2016) managed to generate dividend yields of above 6% with the highest at 8.82% (7.68% in 2016), a reflection of the tougher market conditions. The performance of the 18 REITs for 2017 are summarized in the table below: 120 Pavilion REIT 2017 Annual Report

74 Market (cont d) No. Company Property portfolio 1 AHP Office shops 2 Alaqar Health care 3 Al-Salam Islamic diversified 4 AmFirst Office / Retail Market Capital (RM) EPS (sen) P/E Ratio ROE (%) Dividend Yield (%) NTA (RM) Share Price (RM) m b m m Amanah Raya Diversified m n.a. n.a. n.a Atrium Industrial m Axis Offices / b Industrial / Retail 8 Capitaland Retail b Hektar Retail m IGB Retail 6.32 b Kip Retail KLCCP Office / b Retail 13 MRCB-Quill Office / b Retail 14 Pavilion Office / b Retail 15 Sunway Diversified b Tower Office m UOA Office m YTL Hospitality Hotels b n.a. n.a. n.a Source: Malaysia Stock Biz & individual REIT websites, share prices as at 29 December 2017 Investors were generally cautious about REITs as the majority of the REITs own office buildings and malls which have been reported to be in oversupply. The weaker consumer sentiments have also compounded the weakness of the segment. This has affected share prices and it is noted that eight of the REITs registered a drop in their market capitalization compared to a year ago. Nevertheless, it is heartening to note that the other ten have maintained or registered an increase in market capitalization. In October, a new REIT Index was launched by Bursa Malaysia to complement the other ten in-house calculated indices produced by Bursa Malaysia and will track the performance of all listed REITs on the local bourse. As this new index will allow investors to gain exposure to all of the companies on that index, it will provide investors an alternative to investing in individual REITs. Pavilion REIT 2017 Annual Report 121

75 Market (cont d) CONCLUSION The outlook for both the retail and office sectors in 2018 appears challenging, as weaker consumer sentiments and oversupply weighs down heavily on these sectors. In fact Bank Negara Malaysia has sounded the warning bells on the over-built situation as it could have a drastic impact on the financial institutions which funded the construction of these office buildings and malls. In response, the government has announced a proposed freeze on approvals of new office buildings, malls and luxury condominiums priced above RM1 million although it later softened the measure by still allowing developers who can prove the viability of these projects to go ahead. Although the retail market will face a challenging environment, established shopping centres which are well-located, professionally-managed and which are more receptive to the needs of their tenants and customers will be able to survive the current tough market conditions. For new shopping centres which are currently under construction, it will have to be seen whether they will open as scheduled if they have yet to achieve a respectable occupancy rate. Older malls situated in prime locations should be able to maintain their edge but should start planning for refurbishments to upgrade shoppers experience in order to survive in the current highly competitive market The office market will face increasing pressure on both occupancy rates and rentals. Older buildings which have not undertaken any refurbishment / upgrading exercises will lose out in a more competitive market as newer buildings are built to specifications of a higher quality and by offering more incentives, will be able to entice away tenants. Nevertheless, without a substantial increase in overall business activities, newly completed office buildings are expected to take a longer time to reach full occupancy. Overall, the REIT market is facing fundamental issues in the form of weaker business and consumer sentiments and spending as well as an oversupply situation in both the retail and office sectors. This will have a bearish impact on the sector and will affect revenues and income distribution. Nevertheless, REITs which have assets of impeccable quality will be more resilient and will be able to face up to and overcome these short term challenges. 122 Pavilion REIT 2017 Annual Report

76 GLOSSARY Board : Board of Directors of the Manager Bursa Malaysia : Bursa Malaysia Securities Berhad Company : Pavilion REIT Management Sdn Bhd CEO : Chief Executive Officer CPI : Consumer Price Index CSR : Corporate social responsibility Deed : The Deed dated 13 October 2011 entered into between the Trustee and the Manager constituting Pavilion REIT DPU : Distribution per Unit EPU : Earnings per Unit Fund : Pavilion Real Estate Investment Trust FBM KLCI : FTSE Bursa Malaysia Kuala Lumpur Composite Index FY : Financial year from 1 January to 31 December GDP : Gross domestic product GFA : Gross floor area GST : Goods & Service Tax IMF : International Monetary Fund KLP : Kuala Lumpur Pavilion Sdn Bhd Manager : Pavilion REIT Management Sdn Bhd M-REIT : Malaysian Real Estate Investment Trust MER : Management expense ratio - ratio of trust expenses incurred in operating Pavilion REIT to its NAV MGS : Malaysian Government Securities NAV : Net asset value NLA : Net lettable area NPI : Net property income Pavilion REIT : Pavilion Real Estate Investment Trust Prospectus : Pavilion REIT s prospectus dated 14 November 2011 PPKM : Persatuan Pengurusan Kompleks Malaysia / Malaysia Shopping Malls Association REIT : Real Estate Investment Trust Trustee : MTrustee Berhad TAV : Total asset value Unit : An undivided interest in Pavilion REIT as provided for in the Deed WALE : Weighted average lease expiry Pavilion REIT 2017 Annual Report 123

77 NOTICE OF ANNUAL GENERAL MEETING (Established in Malaysia under the Deed dated 13 October 2011 entered into between Pavilion REIT Management Sdn Bhd and AmTrustee Berhad (now known as MTrustee Berhad)) NOTICE IS HEREBY GIVEN that the Sixth Annual General Meeting of Pavilion Real Estate Investment Trust ( Pavilion REIT ) will be held at Saujana Ballroom, The Saujana Hotel, Saujana Resort, Jalan Lapangan Terbang SAAS, Selangor Darul Ehsan, Malaysia on Thursday, 29 March 2018 at a.m. to transact the following businesses:- ORDINARY BUSINESS 1. To lay the Audited Financial Statements of Pavilion REIT for the year ended 31 December 2017 together with the Trustee s Report to the Unitholders issued by MTrustee Berhad, as trustee of Pavilion REIT and the Statement by the Manager issued by Pavilion REIT Management Sdn Bhd, as the manager of Pavilion REIT and the Auditors Report thereon. (Please refer Explanatory Note I) SPECIAL BUSINESS To consider and, if thought fit, to pass with or without any modification, the following Resolution: 2. PROPOSED AUTHORITY TO ALLOT AND ISSUE NEW UNITS PURSUANT TO CLAUSE OF THE SECURITIES COMMISSION MALAYSIA S GUIDELINES ON REAL ESTATE INVESTMENT TRUSTS (REITS GUIDELINES) (PROPOSED AUTHORITY) THAT pursuant to the REITs Guidelines, Main Market Listing Requirements of Bursa Malaysia Securities Berhad and the approval of the relevant regulatory authorities, where such approval is required, authority be and is hereby given to Pavilion REIT Management Sdn Bhd ( the Manager ) to allot and issue new units in Pavilion REIT ( New Units ) from time to time to such persons and for such purposes as the Manager may in its absolute discretion deem fit and in the best interest of Pavilion REIT, provided that the aggregate number of New Units issued pursuant to this resolution, when aggregated with the number of units in Pavilion REIT issued during the preceding 12 months, must not exceed 20% of the approved fund size of Pavilion REIT of 3,318,000,000 units; Ordinary Resolution AND THAT the Proposed Authority shall be effective and continue to be in force from the date of receipt of all relevant authorities approval or the date the Unitholders pass this resolution, whichever may be the later, until: (a) the conclusion of the next annual general meeting ( AGM ) of the Unitholders, at which time it shall lapse, unless by a resolution passed at the meeting, the authority is renewed; or (b) (c) the expiration of the period within which the next AGM of the Unitholders is required by law to be held; or the Proposed Authority is revoked or varied by the Unitholders in a Unitholders meeting; 124 Pavilion REIT 2017 Annual Report

78 Notice of Annual General Meeting (cont d) whichever occurs first ( Validity Period ); AND THAT the New Units to be issued pursuant to the Proposed Authority shall, upon allotment and issuance, rank pari passu in all respects with the existing Units except that the New Units will not be entitled to any distributable income, right, benefit, entitlement and/or any other distributions that may be declared before the date of allotment and issuance of such New Units; AND THAT authority be and is hereby given to the Manager and the Trustee, acting for and on behalf of Pavilion REIT, to give effect to the aforesaid Proposed Authority with full powers to assent to any condition, variation, modification and/or amendment in any manner as the Manager and the Trustee may deem fit and in the best interest of Pavilion REIT and/or as may be imposed by the relevant authorities, and to deal with all matters relating thereto; AND FURTHER THAT authority be and is hereby given to the Manager and the Trustee, acting for and on behalf of Pavilion REIT, to take all such steps and do all acts, deeds and things in any manner (including the execution of such documents as may be required) as they may deem necessary or expedient to implement, finalise, complete and give full effect to the Proposed Authority. BY ORDER OF THE BOARD Pavilion REIT Management Sdn Bhd ( H) (as the Manager of Pavilion Real Estate Investment Trust) Lim Mei Yoong (LS 02201) Company Secretary Kuala Lumpur 28 February 2018 Notes : 1. A unitholder who is entitled to attend at the meeting is entitled to appoint not more than 2 proxies to attend instead of him. A proxy need not be a unitholder. Where a unitholder appoints 2 proxies, the appointments shall be invalid unless he specifies the proportions of his holding (expressed as a percentage of the whole) to be represented by each proxy. 2. Where a unitholder is a corporation, its duly authorised representative shall be entitled to attend at the meeting and shall be entitled to appoint another person (whether a unitholder or not) as its proxy to attend. 3. Where a unitholder is an authorised nominee as defined under the Securities Industry (Central Depositories) Act 1991, it may appoint not more than 2 proxies in respect of each securities account it holds in units standing to the credit of the said securities account. Where a unitholder appoints 2 proxies, the appointments shall be invalid unless it specifies the proportions of its holdings (expressed as a percentage of the whole) to be represented by each proxy. 4. The instrument appointing a proxy shall be in writing under the hand of the appointor or of its attorney duly authorised in writing or if such appointor is a corporation either under its common seal or under the hand of an officer or attorney so authorised. 5. The instrument appointing proxy shall be deposited at the Registered Office of the Manager at 6-2, Level 6, East Wing, Menara Goldstone (Holiday Inn Express), No. 84, Jalan Raja Chulan, Kuala Lumpur not later than 27 March 2018 at a.m. being 48 hours before the time appointed for holding the Meeting or any adjournment thereof. 6. Only unitholders registered in the Record of Depositors as at 22 March 2018 shall be entitled to attend and speak at the meeting or appoint proxy(ies) to attend on his behalf. 7. Pursuant to Paragraph 8.29A(1) of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad, the Proposed Ordinary Resolution set out in the Notice of Annual General Meeting will be put to vote by way of poll. Pavilion REIT 2017 Annual Report 125

79 Notice of Annual General Meeting (cont d) Explanatory Notes on: (I) Ordinary Business This Agenda is meant for discussion only as under the provision of the REITs Guidelines, audited financial statements do not require formal approval of the unitholders. Hence, this matter will not be put forward for voting. (II) Special Business The Proposed Ordinary Resolution, if passed, would enable the Manager to allot and issue New Units from time to time provided that the aggregate number of the New Units to be issued during the Validity Period, when aggregated with the number of units issued during the preceding 12 months must not exceed 20% of the approved fund size of Pavilion REIT of 3,318,000,000 units. The Proposed Authority will allow the Manager the flexibility to allot and issue New Units to raise funds to finance future investments, acquisitions and/or capital expenditure to enhance the value of Pavilion REIT and/or to refinance existing debt as well as for working capital purposes, subject to the relevant laws and regulations. With the Proposed Authority, delays and further costs involved in convening separate general meetings to approve such issue of New Units to raise funds can be avoided. The Manager may, subject to relevant laws and regulations, use the net proceeds from the issuance of New Units under the Proposed Authority as its absolute discretion for other purposes as permitted for under the REITs Guidelines. Any allotment and issuance of New Units pursuant to the Proposed Authority will be subject to the relevant approvals of Securities Commission Malaysia and Bursa Malaysia Securities Berhad. 126 Pavilion REIT 2017 Annual Report

80 (Established in Malaysia under the Deed dated 13 October 2011 entered into between Pavilion REIT Management Sdn Bhd and AmTrustee Berhad (now known as MTrustee Berhad)) PROXY FORM No. of Units Held CDS Account No. I/We (name of unitholder as per NRIC, in capital letters) NRIC No./Passport No./Company No. Tel./Mobile No. of (full address) being a unitholder of PAVILION REAL ESTATE INVESTMENT TRUST ( Pavilion REIT ) and entitled to vote hereby appoint:- 1 st PROXY A Full name : Address : NRIC No./Passport No./ Company No.: Proportion of unitholdings represented No. of Units % and/or failing *him/her 2 nd PROXY B Full name : Address : NRIC No./Passport No./ Company No.: Proportion of unitholdings represented No. of Units % or failing *him/her, the Chairman of the Meeting as *my/our proxy to attend and vote for *me/us on *my/our behalf at the Sixth Annual General Meeting of Pavilion REIT to be held at Saujana Ballroom, The Saujana Hotel, Saujana Resort, Jalan Lapangan Terbang SAAS, Selangor Darul Ehsan, Malaysia on Thursday, 29 March 2018 at a.m. and any adjournment thereof. * Strike out whichever not applicable Please indicate with an X in the space below on how you wish your votes to be cast. If you do not do so, the proxy/proxies will vote or abstain from voting at his/her/their discretion. Ordinary Resolution Special Business For Against Proposed Authority to Allot and Issue New Units Dated this day 2018 Signature of Unitholder/Common Seal Notes : 1. A unitholder who is entitled to attend at the meeting is entitled to appoint not more than 2 proxies to attend instead of him. A proxy need not be a unitholder. Where a unitholder appoints 2 proxies, the appointments shall be invalid unless he specifies the proportions of his holding (expressed as a percentage of the whole) to be represented by each proxy. 2. Where a unitholder is a corporation, its duly authorised representative shall be entitled to attend at the meeting and shall be entitled to appoint another person (whether a unitholder or not) as its proxy to attend. 3. Where a unitholder is an authorised nominee as defined under the Securities Industry (Central Depositories) Act 1991, it may appoint not more than 2 proxies in respect of each securities account it holds in units standing to the credit of the said securities account. Where a unitholder appoints 2 proxies, the appointments shall be invalid unless it specifies the proportions of its holdings (expressed as a percentage of the whole) to be represented by each proxy. 4. The instrument appointing a proxy shall be in writing under the hand of the appointor or of its attorney duly authorised in writing or if such appointor is a corporation either under its common seal or under the hand of an officer or attorney so authorised. 5. The instrument appointing proxy shall be deposited at the Registered Office of Pavilion REIT Management Sdn Bhd at 6-2, Level 6, East Wing, Menara Goldstone (Holiday Inn Express), No. 84, Jalan Raja Chulan, Kuala Lumpur not later than 27 March 2018 at a.m. being 48 hours before the time appointed for holding the Meeting or any adjournment thereof. 6. Only unitholders registered in the Record of Depositors as at 22 March 2018 shall be entitled to attend and speak at the meeting or appoint proxy(ies) to attend on his behalf. 7. Pursuant to Paragraph 8.29A(1) of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad, the Proposed Ordinary Resolution set out in the Notice of Annual General Meeting will be put to vote by way of poll.

81 Please fold here Affix Stamp The Manager of Pavilion Real Estate Investment Trust PAVILION REIT MANAGEMENT SDN BHD ( H) 6-2, Level 6, East Wing, Menara Goldstone (Holiday Inn Express) No. 84, Jalan Raja Chulan Kuala Lumpur Please fold here

82 Pavilion REIT Management Sdn. Bhd. Company Number : H Level 10, Pavilion Kuala Lumpur, 168 Jalan Bukit Bintang, Kuala Lumpur T : F : info@pavilion-reit.com